Racial Gaps in the Labor Market: The Role of Nonwhite Entrepreneurship

We investigate how the racial composition of entrepreneurs affects racial differences in labor market outcomes of workers. We create a novel data set that identifies the race of firm owners in Brazil and link it with matched employer-employee data that contains information on the universe of formal employment contracts. We first present evidence of assortative matching between nonwhite workers and nonwhite entrepreneurs. Controlling for a wide set of covariates, we find that the share of nonwhite workers is 18.7% higher in firms with at least one nonwhite owner. We then show that the adjusted racial wage gap is 28% smaller in firms with nonwhite entrepreneurs than in white-owned firms. This is partially explained by nonwhite workers accessing better occupations in firms with nonwhite entrepreneurs. Lastly, we show that nonwhite workers are 15% more likely to become entrepreneurs if they were previously employed by nonwhite entrepreneurs than if they were employed by white entrepreneurs.