Economic Freedom and Racial Differences in Entrepreneurship

Abstract

We investigate the relationship between economic freedom and black versus white entrepreneurship rates. An extensive literature examines why black entrepreneurship rates lag behind white, focusing on socioeconomic characteristics, intergenerational knowledge transfers, work experience, and credit access. Another literature examines how regulations affect entrepreneurial behavior, finding that a more heavily regulated economy deters start-ups. We combine these literatures and use the Kauffman Index of Entrepreneurial Activity and the Economic Freedom of North America Index to examine whether state-level variation in economic freedom causes differences in entrepreneurial behavior across races. Overall, we find that blacks and whites differ in their entrepreneurial response to public policy. One interesting finding is that more economically free labor markets, due primarily by a lower minimum wage, diminish black entrepreneurship but does not affect whites. This is important if an unintended consequence of the minimum wage is to reduce black entrepreneurship, thereby increasing the black–white entrepreneurship gap.