People who have been incarcerated are more likely to turn to entrepreneurship after prison to overcome discrimination in the labor market, especially formerly incarcerated Black men who face the highest barriers to employment.

In his co-authored study, Wharton management professor Damon J. Phillips found that previously incarcerated individuals are 5% more likely to start their own business, compared with the general public. For Black men who have been incarcerated, entrepreneurship leads to higher incomes than traditional employment and less recidivism.

Phillips said the results of the study should be eye-opening for employers who distrust and discriminate against job applicants with a criminal past, and for policymakers allocating resources to help the imprisoned population.

The Reality of Life After Prison

“The set of stereotypes we have about people who have been incarcerated works against the goal of having a strong workforce,” Phillips said. “Given that almost a third of adults have some form of criminal record, the health of the economy and public safety is improved when you provide employment opportunities for these citizens.”

The paper was co-authored by Kylie Jiwon Hwang, management and organizations professor at Northwestern University’s Kellogg School of Management. The scholars believe it is the first study to investigate entrepreneurship as a response to labor market discrimination for those with criminal records.

“It’s not just an entrepreneurship story, it’s an employment story.”— Damon J. Phillips

Phillips credits Hwang with coming up with the research focus when she was his doctoral student several years ago. He was leading a program to provide business education in prisons outside New York City, and she was interested in studying systemic inequality in the labor market, especially for stigmatized people such as those with criminal records. The scholars came to understand a common refrain from currently and formerly incarcerated people: They wanted to know how to start their own businesses, because they knew that what awaited them after prison was a paucity of low-wage, high-risk jobs limited to industries such as construction or the service industry.

“We’d talk to these focus groups, and they would tell us that their favorite show is ‘Shark Tank,’” Phillips said, referring to the entrepreneurial TV series. “The idea for the study wasn’t to show how entrepreneurship was a viable alternative, it was to test and question whether it was.”

Returning Citizens Often Cast Aside by Employers

Armed with plenty of anecdotes, the scholars set out to find evidence. They analyzed data from the U.S. Longitudinal Survey of Youth along with data from the National Employment Law Project on ban-the-box policies. Known as the Fair Chance Act, these policies prohibit employers from conducting criminal background checks until later in the application process.

In jurisdictions with a ban-the-box policy, formerly incarcerated Black men were the only group less likely to become entrepreneurs. That finding is consistent with the idea that the severity of labor market discrimination is experienced to a greater extent by Black men, who are incarcerated at significantly higher rates than any other group.

Phillips acknowledged that employers may have understandable concerns about hiring returning citizens, including public relations. But he said there is a business case for not “leaving talent on the table” and giving them opportunities to add value to their employers.

Phillips said the study points to a need for more education and support for returning citizens wanting to start a business, such as helping them write a strong business plan or increasing their access to capital. It’s also a call for companies to think about their procurement rules and consider vendors and contractors who were once imprisoned.

“The set of stereotypes we have about people who have been incarcerated works against the goal of having a strong workforce.”— Damon J. Phillips

The professor emphasized that entrepreneurship is difficult and fraught, with failure for any venture as a common outcome. Prescribing it to a marginalized population should be done with caution and an understanding of the labor market opportunities that this population may face.

“In a better world, people with criminal records have better job opportunities, education and training so that if they start a business, they are starting them because they really want to,” Phillips said. “Until we get to that better world, we owe it to them – and society – to help them start businesses when it is the best option for them.”

One of the paper’s most noteworthy findings is on recidivism: Returning citizens who become entrepreneurs are much less likely to return to prison, even when compared with their cohort peers in traditional employment. The research doesn’t identify exactly why, but Phillips and Hwang think it has to do with better wages, greater stability, and a sense of community pride that comes with entrepreneurship.

“Some of that, we believe, is about the dignity of work,” Phillips said. “I do think there are distinct advantages associated with entrepreneurship, especially for a population that is stigmatized. But it’s not just an entrepreneurship story — it’s an employment story.”

The Bigger Policy Picture

In 2022, Phillips was invited to testify before a U.S. Senate committee hearing on entrepreneurship among formerly incarcerated people. With nearly 1.8 million behind bars, the U.S. tops the world for the number of people imprisoned and ranks sixth for the rate of incarceration relative to the population. It’s a topic with a lot of bipartisan overlap, Phillips said, but also considerable finger-pointing.

“There are important debates on how we got into the problem of mass incarceration in the first place,” he said. “But that’s not our research. We are business school scholars. Doing this from a business school perspective is helpful because business schools seek to offer pragmatic solutions. We’re really trying to develop solutions.”

Phillips and Hwang said their findings show how the issues of labor market discrimination and inequality need much more research, and they invite other scholars to build on their work.

“This study was informed by talking and working with people who are actually living through this,” Phillips said. “Kylie and I want other academics to read our study because we are hoping others will advance these kinds of topics.”

Phillips will be speaking at an upcoming conference, The Business Case for Second Chance Employment, hosted by the Wharton Coalition for Equity and Opportunity.