After Prison, Opportunities Are Hard to Come By. Enter Entrepreneurship.

But while some shared that entrepreneurship was a natural fit for their lifestyle or personality, others gave the Kellogg researcher a very different reason why they set off on their own.

They couldn’t find any other employment.

“The stigma of a criminal record or incarceration is so pervasive in the United States,” says Hwang, an assistant professor of management and organizations at the Kellogg School. “Incarceration histories are a big turn-off for potential employers, and this is particularly true for Black individuals.”

Entrepreneurship, then, would seem one of the few ways for people facing high levels of labor-market discrimination to build a rewarding career in the U.S.

In a recent study—the first of its kind—Hwang and her coauthor, Damon Phillips of the Wharton School at University of Pennsylvania, set out to look explicitly at the relationship between incarceration and entrepreneurship. To what extent was labor-market discrimination responsible for pushing individuals with a history of incarceration into entrepreneurship—and, for those who did start their own business, was it a good option?

The researchers find that formerly incarcerated individuals are 40 percent more likely than peers with no history of incarceration to pursue entrepreneurship. And, generally speaking, the decision serves them well: these entrepreneurs earn higher incomes, and are less likely to experience recidivism, than those who go to work for companies.

But the researchers also find that, in areas with less labor-market discrimination against people with a criminal record, entrepreneurship is significantly less popular—especially among Black individuals.

“It shows us that one of the main reasons why formerly incarcerated individuals were going into entrepreneurship was really the lack of employment opportunities,” says Hwang. For that reason, she argues, policies should focus on improving employment options as well as encouraging entrepreneurship for this group.

From prison to entrepreneurship

The study by Hwang and Phillips is the first to highlight how entrepreneurship among the formerly incarcerated is a response to discrimination in the labor market.

“There’s only a handful of other studies on entrepreneurship and incarceration, because most research has been focused on the incarceration and employment,” says Hwang. “The few that have looked at entrepreneurship for formerly incarcerated people have mostly focused on how individual characteristics, like risk-taking personalities, lead them to start businesses.”

But the researchers had a feeling that wasn’t the whole story.

Their study relied on two sets of data. The first is the U.S. National Longitudinal Survey of Youth 1997, which follows the lives of 8,984 people born between 1980 and 1984. This dataset provided basic demographic information about the survey respondents, along with details about their employment, youth detention, and adult incarceration.

In addition, researchers used hand-collected data from the National Employment Law Project, detailing local implementation of “ban-the-box” policies. Also known as the Fair Chance Act, these are laws that remove the check box on a job application that asks about criminal history, restricting employers from asking for this information until later stages in the hiring process. As of 2019, these policies have been adopted by public employers in 35 states, Washington D.C., and 170 cities and counties.

The researchers’ analysis found that people who have been incarcerated are more likely to become an entrepreneur than those who haven’t. The average non-incarcerated person has a 9 percent likelihood of becoming an entrepreneur, but a formerly incarcerated person has a 13.3 percent chance. The link between incarceration and entrepreneurship holds even when controlling for a wide range of demographic factors.

Pushed into entrepreneurship

But the researchers also find evidence that formerly incarcerated individuals are pushed into entrepreneurship by a lack of other opportunities.

In places with ban-the-box policies, where employment is easier to come by for those with a history of incarceration, entrepreneurship isn’t as popular of a choice—particularly for Black individuals, who face the highest levels of labor-market discrimination.

“My paper is not only showing that entrepreneurship is an unexamined solution for formerly incarcerated people,” says Hwang, “but also highlighting how bad reentering the job market is for them,” she says.

That said, given the abysmal opportunities currently available to this group, entrepreneurship can nonetheless be a good option, the researchers find. Among those who have previously spent time in prison, white entrepreneurs earned 5 percent more per year than white employees. For Black entrepreneurs, the benefit of entrepreneurship was even larger, at 12 percent.

Entrepreneurship wasn’t just more lucrative; it also led to lower rates of recidivism. While being employed by a company lowers the one-year recidivism rate by 55 percent over being unemployed, entrepreneurship lowers the same rate by 64 percent.

These tangible benefits are in addition to the ones that don’t show up in the data, says Hwang—like improved job satisfaction and the feeling that the work is meaningful to the community—especially compared with the kinds of menial jobs generally available to those with a record of incarceration.

A way forward through policy

Hwang first became interested in the challenges of reentering society after serving time when she worked at a criminal-background-check company, prior to starting her Ph.D. studies. There, her eyes were opened to the country’s sky-high incarceration and recidivism rates, and how difficult it is to find a job with a criminal record, particularly for racial minorities.

Changing this reality has been a major aim of her research, which was recently cited in a Proposed Rule by the Small Business Administration to expand loan access to those with criminal records. She would like to see more resources made available to formerly incarcerated individuals, both to encourage their entrepreneurial success—perhaps by offering financial backing or additional education—but also to reduce the discrimination that makes entrepreneurship someone’s best (or only) option.

Making the leap to entrepreneurship is not for everyone. Even under the best of circumstances, many ventures fail. That’s why Hwang says more must be done to assist this subsection of jobseekers in finding gainful and fulfilling employment.

And with 1.8 million Americans currently imprisoned, the challenge of reentry won’t go away anytime soon. “The social repercussions of having people with incarceration records not successfully reintegrate into society are drastic,” says Hwang.