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«National Poverty Center Working Paper Series #13-04 March 2013 The Impact of City Contracting Set-Asides on Black SelfEmployment and Employment Aaron ...»

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National Poverty Center Working Paper Series


March 2013

The Impact of City Contracting Set-Asides on Black SelfEmployment and Employment

Aaron K. Chatterji, Duke University, Kenneth Y. Chay, Brown University, and Robert

W. Fairlie, University of California, Santa Cruz

This paper is available online at the National Poverty Center Working Paper Series index at:


Any opinions, findings, conclusions, or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the view of the National Poverty Center or any sponsoring agency.

The Impact of City Contracting Set-Asides on Black Self-Employment and Employment* Aaron K. Chatterji Fuqua School of Business Duke University 1 Towerview Drive Durham, NC 27708 ronnie@duke.edu Kenneth Y. Chay Brown University Department of Economics Providence, RI 02912 Kenneth_Chay@brown.edu Robert W. Fairlie Department of Economics, Engineering 2 Bldg.

University of California Santa Cruz, CA 95060 rfairlie@ucsc.edu February 2013 * We thank Tim Bates, Danny Boston, William Darity, Bart Hamilton, Mark Killingsworth, George La Noue, Michael Lechner, Steve Lewis, Mike Long, Justin Marion, Margaret Simms, John Sullivan, Jon Wainwright, Doug Wissoker, and seminar participants the NBER Working Group on Entrepreneurship Meetings, American Economic Association Meetings, Association for Public Policy Analysis and Management Meetings, the Symposium on Race and Economic Progress at Rutgers University, the United States Association for Small Business and Entrepreneurship Annual Meeting, the IZA Social Policy Evaluation Annual Conference, the Society for Labor Economists Meetings, and the Conference on Affirmative Action at the University of Minnesota for helpful comments and suggestions. Steve Anderson provided excellent research assistance.

The Impact of City Contracting Set-Asides on Black Self-Employment and Employment Aaron K. Chatterji, Kenneth Y. Chay, and Robert W. Fairlie ABSTRACT In the 1980s, many U.S. cities initiated programs reserving a proportion of government contracts for minority-owned businesses. The staggered introduction of these set-aside programs is used to estimate their impacts on the self-employment and employment rates of African-American men. Black business ownership rates increased significantly after program initiation, with the black-white gap falling three percentage points. The evidence that the racial gap in employment also fell is less clear as it is depends on assumptions about the continuation of pre-existing trends. The black gains were concentrated in industries heavily affected by set-asides and mostly benefited the better educated.

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Robert W. Fairlie Department of Economics University of California, Santa Cruz Santa Cruz, CA 95064 rfairlie@ucsc.edu I. Introduction Since the early 1970s hundreds of billions of dollars have been spent on programs that set aside or set percentage goals for government contracts for minority-owned firms and subcontractors. In 2008 alone, $28.2 billion of federal procurement contracts were awarded to disadvantaged business enterprises, representing 6.3 percent of the total value of all federal contract awards (SBA 2008). The amount spent on affirmative action contracting programs for minority-owned firms dwarfs the total amount spent by the federal government on enforcement of statutes legislating antidiscrimination and affirmative action in employment, such as Title VII of the 1964 Civil Rights Act and Executive Order 11246.1 The 1980s, in particular, witnessed substantial growth in the value of city government contracts reserved for minorityowned business. The stated purpose of these set-aside programs was to develop minority enterprise, counter the effects of past discrimination, and reduce the high unemployment rates among urban minorities during the 1980s.

Over the last two decades, the city programs established in the 1980s have been judicially and legislatively challenged and dismantled. The City of Richmond v Croson Co. Supreme Court decision in January 1989 invalidated the use of such programs unless they were used as narrowly tailored remedies for identified discrimination. The 1995 Adarand Constructors, Inc. v. Peña Supreme Court decision, and voter referenda passed in California (1996), Washington (1998) and other states, further brought into question the future of government-sponsored set-asides.

Given the legal and political controversy surrounding these programs, there is surprisingly little quantitative evidence on their effects, especially on the formation of minority-owned businesses. We evaluate the impact of the numerous affirmative action contracting programs passed in large cities during the 1980s on business ownership and employment of African-American men. The impact on black selfemployment is of special interest since blacks continue to have substantially lower rates of business For example, in fiscal year 2001, the Equal Employment Opportunity Commission (EEOC) obtained $247.8 million for charges filed and resolved under all statutes enforced by the EEOC (Title VII, ADA, ADEA, and EPA);

while the Office of Federal Contract Compliance Programs (OFCCP) – charged with enforcing Executive Order 11246, Section 503 of the 1973 Rehabilitation Act, and the 1974 Vietnam Era Veterans’ Readjustment Assistance Act – obtained $29.0 million in financial remedies. Procurement of city government contracts to minority-owned firms located just in Washington D.C. was $170 million in 1985 alone.

ownership than whites even in light of the major gains made in education, earnings, civil rights and political representation (Fairlie and Robb 2008). As the main alternative to wage and salary employment, business ownership has important implications for earnings and wealth inequality. Prior work suggests that the self-employed accumulate more wealth than wage and salary workers and have higher savings rates (Borjas 1999, Bradford 2003).2 While business owners represent roughly one-tenth of the workforce, they hold nearly 40 percent of total U.S. wealth (Bucks, Kennickell, and Moore 2006).

Further, since black firms are more likely to hire minorities, it has been argued that promoting black business growth is a more effective approach to reducing black unemployment than overall economic development (Bates 1993, Boston 1999, 2006, and U.S. Census Bureau 1997).

A growing number of studies indicate that limited financial and social capital and discrimination are partly responsible for low rates of business formation among blacks.3 Blacks have been found to face discrimination in credit markets, which will constrain business formation even when the return of the business exceeds the market borrowing rate. Low levels of personal wealth and liquidity constraints may also reduce opportunities to start and operate successful black businesses. Previous research further finds that black firms face consumer discrimination and have limited opportunities to penetrate networks, such as those in construction. Each of these barriers to black business creation suggests a potential for affirmative action contracting programs to address an efficiency loss.

With Current Population Survey data on black and white men from 1979 to 1989, we use the staggered timing of set-aside programs across U.S. cities to estimate their impacts on the self-employment and employment rates of African-Americans. We use “difference-in-differences-in-differences” (DDD) and an “event study” methodology, based on the exact dates of program implementation, to estimate the program effects. The latter approach allows us to examine trends in black and white rates, before and after program initiation, and test for non-randomness in the timing and location of the programs.

Hamilton (2000) finds that earnings differentials between the self-employed and wage and salary workers cannot be explained by negative selection into self-employment and concludes that the nonpecuniary benefits of selfemployment are large.

For example, see Bates (1997), Fairlie (1999), Hout and Rosen (2000), Cavalluzzo, Cavalluzzo, and Wolken (2002), Blanchflower, Levine and Zimmerman (2003), and Fairlie and Robb (2008). There is little evidence that blacks have less preference for business ownership (Koellinger and Minniti 2006, Walstad and Kourilsky 1998).

Remarkably, there is little consensus in the literature on the exact start dates of city programs.

We construct a new database of affirmative action program dates from four sources – in addition to two existing sources that often disagree, we conducted an extensive search of federal and state court cases and interviewed numerous government employees and officials involved with city programs. The resulting information allows us to cross-validate the program dates and investigate the impact of set-asides more comprehensively and reliably than previous studies.

Black business ownership rates increased significantly after program initiation, with the blackwhite self-employment gap falling by three percentage points (35-40 percent). The evidence is clear, as the self-employment gap is stable in the years preceding set-asides, and the magnitudes correspond with information from other sources on the growth in, and the set-aside amounts awarded to, black-owned businesses. The racial gap in employment fell by roughly four percentage points after program initiation, but these results are sensitive to assumptions about the continuation of pre-existing trends. City programs were preceded by several years of declining black employment in the industries that did not benefit from the programs (e.g., manufacturing and government). Black employment rates in the sectors most affected by set-asides, however, are more stable in the pre-program period.

The black gains are concentrated in industries heavily affected by set-asides and accrued mostly to the better educated. It appears that city programs led to a reallocation of self-employment from white to black men, as there is little change in the aggregate rates. This finding is sensible as overall spending by city governments did not change – that is, set-asides appear to have impacted the share of contracts awarded to minority firms but not the total amount of awards. The employment effects in the most affected sector imply that set-aside programs increased black employment more than affirmative action programs that explicitly set goals for minority hiring in firms that receive federal contracts.

The next section describes the set-aside programs and discusses the few studies exploring their impacts. Section III details the data on set-aside program dates. Section IV discusses the CPS data and presents black self-employment and employment trends during the 1980s. Section V presents the econometric framework, and Section VI contains the empirical results. Section VII concludes.

II. City Set-Aside Programs Background There are two types of set-aside programs. In one variant, a specified percentage of the number or total dollar value of government contracts is allotted to minority-owned businesses. In the other, prime contractors are required to allot a specified percentage of the total amount of government contracts to minority-owned subcontractors and/or suppliers (Rice 1991 and Myers 1997).4 The percentage goals vary across programs and sometimes within programs for different purchases, such as construction contracts, procurement of goods and services, and professional services. Data on local set-aside programs listed in MBELDEF (1988) indicate that these goals range from 1 to 50 percent, with most programs having goals of 5 to 15 percent. Set-aside programs are often complemented with procurement officials who provide more general assistance to minority-owned businesses (Bates and Williams 1993).

Set-aside programs exist at the federal, state, city, county, and special district (e.g., airport, water, sanitary, park, and school) levels. At the federal level, the Small Business Administration’s (SBA) 8(a) program – established in 1968 as an amendment to section 8 of the Small Business Administration Act of 1953 – is the best-known. In 8(a), the SBA serves as the prime contractor for goods and services to various federal agencies and provides subcontracts to firms that are owned by socially and economically disadvantaged individuals.5 In 1983, 8(a) contracts totaled $2.3 billion (Bates 1985). Another federal program is the 1977 Public Works Employment Act, which required that 10 percent of all federal public works contracts be given to minority-owned businesses (Bates 1985). This program’s constitutionality was soon challenged leading to the U.S. Supreme Court’s ruling in Fullilove v. Klutznick, which upheld the federal government’s use of these programs. The federal government reported $4.4 billion in total contract awards to minority and disadvantaged firms in FY 1986 (Rice 1991).

Fullilove v. Klutznick sparked the creation of set-aside provisions among other federal agencies, and state and local governments. Most states created set-aside programs for minority-owned businesses The constitutionality of this type of set-aside was challenged in the 1995 Adarand v. Peña Supreme Court case.

The SBA considers blacks, Hispanics, Native Americans, and Asian Pacific Americans as socially disadvantaged.

In 1978, 96 percent of 8(a) firms were owned by minorities (Bates 1985).

as a direct response to requirements that state departments of transportation administering federal highway grants and contracts oversee implementation of the federal set-aside provisions (Myers 1997).6 Over 200 local governments created minority business set-aside programs in response to the Fullilove v.

Klutznick ruling (Myers 1997). Most of these programs were created in the early to mid-1980s, and many were quite substantial, especially in large central cities (Bates 1985, MBELDEF 1988). For example, Atlanta’s set-aside program provided minority- and white female-owned businesses with $191 million between 1979 and 1989 (Boston 1999), and procurement to minority-owned firms in Washington, D.C.

was $170 million in 1985 alone (Rice, 1991).

Potential Effects of Programs The primary justification for affirmative action in government contracting is that it addresses discrimination against black firms. Set-aside programs may counteract the effects of consumer discrimination against black-owned businesses (Borjas and Bronars 1989, Meyer 1990 and Kawaguchi

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