Daniel Auguste On Barriers To Entrepreneurial Success For Low- And Middle-Income People

Judith Siers-Poisson Daniel, thanks so much for joining us today!

Daniel Auguste [00:00:00] Thank you for having me today.

Siers-Poisson [00:00:02] Your work focuses on entrepreneurship and how social inequalities affect the context in which people are trying to make a living by working for themselves. How did you come to be interested in that topic?

Auguste [00:00:15] I am interested in studying inequality in entrepreneurship because I experienced economic marginalization firsthand, growing up in a modest community. And my experience really has developed an interest and understanding of ways to create a more shared economic prosperity. And therefore, I’m interested in understanding this drive, really motivated me to understand the different ways that economic marginalization and economic inequality really undermine people’s ability to access resources and also to create successful businesses. That is one of the key ways of creating intergenerational wealth and of achieving economic mobility.

Siers-Poisson [00:01:13] So when we talk about people working for themselves, we hear terms like self-employed, entrepreneurship and gig work. How are they similar?

Auguste [00:01:23] So entrepreneurship is the process of creating a new venture or business that creates value. And this process can involve an individual or a group of people. And by creating and working for this new business or venture that person becomes their own boss. And that is in itself how we talk about entrepreneurship. And often the new business starts small with only one person or two people. And sometimes it can grow to include more than two people. And then often people refer to themselves and we refer we identify these people or talk about them as entrepreneurs and self-employed. And the self-employment activity can stay small depending on the characteristic of the person, meaning that the resource endowment available to that person and also the environment. So self-employment is in the academic community, often is referred to as entrepreneurship, you’re entrepreneurs, because when you start a new venture, you start it as, as a solo activity. It can grow to include 1 to 3 and more people. But at the beginning it’s often one person or a group of people, and the difference for gig employment is often one person, however, that person is in kind of ways of doing business, but that person does not stand to benefit the most of the success of that of the company if the company succeeds.

Siers-Poisson [00:03:34] So it sounds like gig work is more maybe working on a contract basis for another enterprise.

Auguste [00:03:40] Yeah, it’s more similar to contract work than an entrepreneur. Now, however, the self-employed can be, you can have contract, but the difference is that the self-employed person has the full autonomy on the activity. And as a self-employed person, you incur the costs of doing business and also you stand to benefit the most, if the self-employment activity succeeds. As opposed to the gig, you are undertaking the risk. To take on example someone who’s driving for Uber or for Lyft, you are provided the materials, you are the equipment for the service, and even making sure that you are safe, the security, everything and some drivers, they have to put cameras in their cars, to, you know, to monitor and then they have to have insurance in the car. And if something happened, they are going to incur the costs of that. However, the success of Uber and Lyft, the driver is not benefiting beyond just what they get from driving, as opposed to a self-employed person, you’re getting everything. If you fail, you fail. But if you if you also succeed, you really stand to benefit a lot. That’s the key difference between gig employment and self-employment as referred as entrepreneurship.

Siers-Poisson [00:05:18] So do we know how many people in the U.S. are engaged in some form of self-employment?

Auguste [00:05:24] Well, it is about 10 to 12% of the labor force is engaged in self-employment activities, and this proportion can be higher in times of economic downturns, such as during the COVID-19 pandemic and some other financial crises, like in 2008. And during these times, at the time of economic downturns, the reason that this proportion is going to be high is because more people are entering into entrepreneurship due to necessity, because a lot of them are losing their jobs. Some businesses are closing and people are getting laid off. So this proportion also is increasing more among people who are more vulnerable to labor market adversities, such as women and some ethnic groups, minorities and Black folks. You would find that increase in self-employment would be higher among the workers who are more vulnerable to labor market adversity. And they would tend to enter entrepreneurship because of blocked labor market opportunities. And overall, and you may see that it could increase as high as 14% and maybe 15%. But the proportion of Americans engaging in the workforce is lower than people who are working for an employer, for a firm, for example.

Siers-Poisson [00:07:04] And I do want to talk more about those different demographic groups that might be more likely to need to go into that kind of self-employment. But first, I want to touch on the idea that American culture puts a lot of emphasis on the image of the self-made person, the entrepreneur, and that all you need to succeed is to be a hard worker. But that really overlooks a lot of the risks and challenges of working for yourself like you’ve already alluded to. Can you talk about what middle- and low-income people face when they’re trying to work for themselves?

Auguste [00:07:40] So entrepreneurship, I’m going to kind of use “entrepreneurship” and supplement in a similar way, given the explanation I gave earlier. So entrepreneurial success requires access to resources. And once you succeed, the reward can be really large, high. And that could be really a great way to build wealth, when you succeed in entrepreneurship. The challenge is that in order to succeed you, you need resources. And because low-income people lack the necessary resources, such as access to capital and the necessary networks that will give them access to the to the important institutional resources to succeed, such as banking and how to access services that you will need to grow your venture. As a result, you will find that a large portion of the population, those who are in the lower-income strata, are unable to actually leverage their entrepreneurial potential, entrepreneurial skill to achieve success or economic mobility through entrepreneurship. So while entrepreneurship is romanticized, is believed to be an ideal pathway to achieve economic mobility, however, that belief is not coupled with the resources necessary for these people to get there. So that’s really the challenge. It’s that there is a mismatch between the ideology and the provisions of what is necessary to turn that this belief into reality.

Siers-Poisson [00:09:51] So given, Daniel, that you were saying that those low- and middle-income individuals often don’t have access to the resources, you know, the phrase is “you need money to make money.” If they don’t have money upfront to put into their business, what kind of self-employment are we talking about? I’m guessing it might be more on some kind of a service level than, say, goods like you were talking about earlier.

Auguste [00:10:21] Yeah. So, because entrepreneurship requires resources and also because for what I mentioned earlier, some people would enter because of blocked labor market mobility. The majority, the large proportion of Americans, we make a living through working for someone. That helps you to actually build the financial capital, to kind of invest and buy a house or do other things. And also, through that experience, you build the network, the skills necessary, that if you want to transition into entrepreneurship, you can transition successfully. And now people who are transitioning due to blocked labor market mobility and due to lack of jobs. So, these people more often would transition into entrepreneurship by necessity. So, their entrepreneurial activities often are an alternative to unemployment. And those activities that tend to be in very low barrier to entry sector and they’re also more likely to exit when a better option comes up. So, for low-income, low-resource endowment people, they’re most likely aid to entrepreneurship due to necessity and survivalist entrepreneurship. And I like to refer to survivalist as opposed to necessity, because you may enter due to necessity because, well, now COVID-19 just makes it difficult for me to go to work and I don’t want to really go into work and I want to I want to retire early, for example. Well, now, if I had a good job that allowed me to build a financial buffer, now I would have time. Now I enter due to necessity because COVID-19 forces me to do so. But I have the financial endowment. Now entering into this entrepreneur activity, I may actually, this activity may grow to become a large business that would employ multiple people. And just because I had that financial endowment, resource endowment, to allow me to actually do that and I had the network, I have the access to the institutional resources as opposed to someone who found themselves at the lower strata of the labor market, low-mobility strata of the labor market and low-wage segment of the labor market. Well, COVID-19 hits. You lose your job, but you didn’t have much, your wage, your earning, didn’t allow you to actually build a financial buffer. Now you enter entrepreneurship, you don’t even have anything to support that entrepreneurial activity. And then it’s just a survivalist type of activity with low potential for growth. And you’re waiting for when the best option manifests itself, and then that’s what you and you’re going to leave it and take that. So that would be more typical, more prevalent among the necessity-based or survivalist-based entrepreneurs, would be more prevalent among low-income individuals.

Siers-Poisson [00:13:55] And in your paper, you did talk about self-employment as a disguised form of unemployment. And it sounds like that’s kind of what you were explaining there.

Auguste [00:14:05] Yes. Then it is an alternative to unemployment. It is survivalist because you are doing it because you don’t have any other options to make a living. And the interesting thing is these people, as I mentioned, could be successful entrepreneurs, but it doesn’t have to be survivalist. They could enter due to necessity, however, if we sources are available in the community, if access to banking, financial capital, if access to the institutional knowledge, the networking, if they had that… They entered by accident, one would say, however, once they’re there having the resources available, this activity can grow to like a strong, stable, established business that would employ people and that would provide enough income to the self-employed or the entrepreneur.

Siers-Poisson [00:15:12] We touched on this earlier, but I’d like to go into it a little more deeply. In your research, did you see race, gender, maybe education levels or even age affecting how and why middle- and low-income people are working for themselves?

Auguste [00:15:30] Yes. So as I mentioned earlier, I’m interested in entrepreneurship and inequality and the link of between them, because I believe that resources are unequally distributed across race, gender, and class. And as a result, because people need resources to achieve success in entrepreneurship, and those resources, access to resources such as the quality network, access to good, well-paying jobs with benefits, and also access to jobs that will allow them to achieve occupational mobility, and then that will allow them to build financial endowment, and these resources, like labor market access, is unequally distribute across race, gender and class. And therefore, because access to these resources are crucial for business success, the entrepreneurial outcomes are going to be unequally distributed by race, gender and class. And in this country, in the United States, there is a racial disparity in access to capital and racial disparity in wealth. And if wealth is important for achieving entrepreneurial success, therefore, entrepreneurial success is going to be unequally distributed by race in the country. And most successful entrepreneurs, a lot of them transitions from a job, from working for a firm, where they build the financial endowment, the network, and the skills to succeed in their entrepreneurial activities. And therefore, what you see, Black Americans, they tend to be less favored compared to their white counterparts by employers. And Black and women also tend to earn, earnings tend to be lower. And therefore, there is a link between your labor market position and your potential for economic mobility when you enter entrepreneurship. So if you transition into entrepreneur from the lo- mobility segments of the labor market and therefore your ability, your potential for achieving success is going to be lower. And therefore, that’s what you see there is a gap in business success, business size and how much racial gap, between successful entrepreneurs, Black businesses and women, businesses that tend to be lower sized and to earn lower profit compared to men and white businesses.

Siers-Poisson [00:18:37] So looking at the bottom line of sorts for these middle- and low-income folks who are either trying to support themselves through self-employment versus those who are working those more traditional wage or salary jobs, who overall is in a more stable economic situation?

Auguste [00:18:57] Let me put it this way. Working for an employer, for a firm, I would say it’s safer. It could be safer. Unless you are in a dead-end job, which is becoming more prevalent in the American economy. Right. And it’s precarious employment. Well, let’s assume if you’re working for a firm and it’s stable, you’re in a good job. That would be safer with good benefit. And the majority of Americans work for an employer, they don’t work for themselves. They are not their own bosses. And for self-employment, if you are self-employed, it is riskier because you are undertaking the risk of doing business. And if you fail, you are also going to incur the costs of failing. And a key difference here is what I mentioned earlier, that if you succeed as self-employed, you stand to really benefit the most from that success. And it is riskier, self-employment is riskier, it’s less safe. However, the potential benefit reward is also high. And as a result, we find only 10 to 12% of the labor force is self-employed and a large proportion of the self-employed is necessity-based, they enter from the lower end of the labor market. But so because entrepreneurship is risky, it requires resources or wealth for you to actually take that risk. Right. And the reason it is you find more people in the lower end of the social strata would enter it, it’s because the cost of entering may be is less for them, because they’re not losing too much by not working, by moving into entrepreneurship. If you have a good, well-paying job with health insurance and pension and all the characteristics of a good job, well, transitioning into entrepreneurship, you’re going to have to provide all of that for yourself. So the costs of transitioning into entrepreneurship would be a little higher. The opportunity cost, you could put it this way. But therefore, you have to really see that economic opportunity to actually enter entrepreneurship. And when you enter, you’re more likely to succeed because you have the necessary resources. A good example of that, one example I would give is the founder of Amazon, Jeff Bezos. He had a good job and transitioned, but he also had a great idea. Right. And now he gets to a point where he has enough financial buffer and he transitioned into entrepreneurship. And you could see he’s achieved success. And if you look at most people who transition from a good job into entrepreneurship, they’re more likely to stay in the entrepreneurial activities and they’re more likely to succeed. And also one thing with also the founder of Amazon, his parent, invested a large amount of money and at the early stage, the wealth endowment, right there, is also crucial that provides you with that financial resource you need. But also you could also have a mental… Initially maybe allow you to transition because you know, well, if anything, I can call Mom, Dad, you’re not going to call him. But, you know, at least I really believe in this idea. I can make it. But if push comes to shove, I think I have this, I can call on them to pay my mortgage or my rent for a month.

Siers-Poisson [00:23:04] So, Daniel, as we wrap up, you’ve done a great job of explaining what the barriers are to especially low- and middle-income people who might have a great idea but don’t have that capital, don’t have the networks, don’t have access to the resources. What would you like policymakers to understand about how society would benefit from supporting what you see is that untapped entrepreneurial potential?

Auguste [00:23:32] Thank you for this question. What I would hope that people in positions of power and policy makers in particular, and people who are in position of gatekeepers such as financial institutions, people who are lending money to people to finance their entrepreneurial activities, and also to buy a home, to think that you’re not doing charity. You are investing when you make sure that everyone, Black folks and other underrepresented groups, or minority groups, you are ensuring that they have access to a loan and they could buy a house and they could invest in their entrepreneurial activities. What you do in you expanding the pool of potential customers for yourself, because these people are your customers and those ventures, if they are successful, they are going to employ people and those employed people, it’s an increase in the purchasing power in your community and then you increase the purchasing power and the pool of potential customers. That’s for private institutions and banks and other people in positions of power. Now, let’s look at the government, well, by making sure that you invest in communities, low-resource, low-income communities, and you’re investing in education, and you make sure that you create policies that allow workers to have a fair share of what they’re helping to produce what you do when you are increasing the purchasing power of the economy, you are also allowing people to build wealth and because wealth is necessary to create successful businesses, what you also do is you are tapping the entrepreneurial potential, the underutilized entrepreneurial potential that is in our society you are unlocking that potential. Because now people, even if you see that they are transitioning back, you see that they will have the resources to do so. As an example, by giving $100 to someone with $10,000, you’re not doing probably much, right, in terms of purchasing power. Right. And also by giving more money, such as, let’s say, tax cuts, for example, to the people at the top and less to those people at the bottom, well, you not increasing, pushing entrepreneurship because these people they already have enough to stimulate the entrepreneurial activities intention. So if they didn’t invest that additional $10,000 $20,000 or even $100,000, that is not going to make a difference with that. But by giving that money to those at the middle, at the bottom, you’re actually having more, you’re allowing this, “oh, OK, I have this financial buffer now that I can undertake that entrepreneurial activity.” So the policymakers should think about entrepreneurs as products of an ecosystem, an entrepreneurial ecosystem that financial makers can make more robust and more fertile for, for new entrepreneurs to emerge, new successful entrepreneurs to emerge. We know that we have them, but often they are necessity- and survivalist-based. What we need, we need to structure the policies that make access to resources, such as access to wealth-building resources more equitable, and therefore, what we’re doing is we are strengthening our entrepreneurial ecosystem and innovation.

Siers-Poisson [00:27:47] Well, Daniel, thank you so much for talking with us today about your research. That’s given us a lot to think about.

Auguste [00:27:53] Thank you for having me today.