Entrepreneurship as Economic Detour?

Abstract

Since the Civil Rights Movement, greater numbers of African Americans have moved into professional work but continue to have lower earnings than their White counterparts. One possible explanation for this difference is that Black professionals have lower earnings because they serve larger percentages of Blacks in their practices. However, little research has documented this hypothesized effect, particularly while controlling for specialization and other important earnings‐relevant characteristics. Additionally, little research has focused on why this effect occurs: Black clients may be less able to pay for costly services, or organizations may devalue work done by professionals when they serve Black clients. This article uses data on the earnings of Black and White doctors to test whether and how the proportion of Black patients influences earnings. It is found that the proportion of Black patients is significantly associated with lower earnings for entrepreneurial Black doctors, higher earnings for entrepreneurial White doctors, and has no association with the earnings of either Black or White doctors who work in nonentrepreneurial settings. Supplementary analysis shows that controlling for doctors’ reliance on Medicare and Medicaid revenues reduces the associations between patients’ racial composition and earnings to zero for both Black and White physicians. These findings suggest that there is little bias in organizational pay‐setting practices against positions that serve larger numbers of Black clients. Instead, disadvantage results from Black patients’ greater reliance on lower paying Medicare and Medicaid insurances and client segregation on the basis of race and class among physicians.