From Prison to Entrepreneurship: Can Entrepreneurship be a Reentry Strategy for Justice-Impacted Individuals?

Introduction

Individuals with criminal records face significant obstacles to employment in the United States (Pager 2003; Pettit and Western 2004; Holzer, Raphael, and Stoll 2003). These employment barriers lead to unsuccessful reentry for returning citizens, as well as persistent economic and social inequality (Western 2002; Uggen 1999). As a response to such negative consequences, scholars and policy-makers have focused on improving the opportunities in wage employment for returning citizens. Yet employment is only one of the channels through which justice-impacted people find work and income. Anecdotal evidence and recent media reports suggest that justice-involved individuals exhibit a keen interest in an alternative pathway to reentry: entrepreneurship. While nascent research suggests that launching one’s independent business is a common route for people with criminal histories, it remains both theoretically and empirically underexamined as a strategy to achieve successful reentry and economic and social mobility.

This article conducts a synthesis of the burgeoning literature to assess the viability of entrepreneurship as an alternative to wage employment for returning citizens. The key questions addressed are as follows: Is entrepreneurship prevalent among individuals with criminal records? Why do returning citizens pursue entrepreneurship? What are the short- and long-term economic and social consequences of entrepreneurship for justice-involved individuals? Do returning citizens face barriers and challenges to entrepreneurship? Finally, what are the potential policy reforms and initiatives to support and facilitate entrepreneurship among the justice-involved population?

I first illustrate the prevalence of entrepreneurship as a labor market choice made by returning citizens. Recent research has established that justice-impacted individuals pursue entrepreneurship at high rates, particularly higher than that of similar non-justice-impacted individuals (e.g., Hwang and Phillips 2020; Bushway et al. 2021; Finlay, Mueller-Smith, and Street 2022). To further explain this trend, I explore the underlying mechanisms driving individuals with criminal histories into entrepreneurship. Evidence suggests that entrepreneurship in this population owes not only to individual-level factors—like risk preferences and dispositions (Fairlie 2002; Gottschalk 2009)—but also structural factors that stem from barriers to employment (Hwang and Phillips 2020).

Given the prevalence of entrepreneurship as a career choice for returning citizens, this article investigates the characteristic outcomes of entrepreneurship among returning citizens. Both quantitative and qualitative work documents that entrepreneurship helps mitigate the income gap (Hwang and Phillips 2020) and boost long-term economic mobility (Hwang 2021b), as well as reduce recidivism (Sonfield 2013; Cooney 2012; Hwang and Phillips 2020), in comparison to wage-employment and unemployment. While such positive outcomes from entrepreneurship establish the benefits of launching one’s own business for returning citizens, the process to building and sustaining a successful business is freighted with challenges and barriers. I proceed to explore the challenges that impede successful entrepreneurial entry for the justice-involved people, charting barriers to financial, human, and social capital.

Finally, having analyzed entrepreneurship’s drivers, outcomes, and barriers among returning citizens, I discuss how such evidence can inform policy that is more supportive of entrepreneurship. I focus on policy implications to address the challenges that justice-involved people face regarding the lack of financial, human, and social capital. Perhaps more importantly, I stress the importance of striking a delicate balance between more traditional efforts around wage employment and relatively new endeavors around entrepreneurship for returning citizens.

Entrepreneurship as an Alternative to Employment

The United States has the world’s largest justice-impacted population. Over 2.2 million people are incarcerated in the nation’s prisons or jails; a further 4.7 million people are under community supervision (Bureau of Justice Statistics 2018). Up to 77 million Americans have criminal records (Prison Policy Initiative 2020), and more than 600,000 people return to society every year (Bureau of Justice Statistics 2018). Importantly, these high rates of incarceration and criminalization disproportionately impact members of racial minorities. For example, compared to White men, African American men are 6 times more likely to be incarcerated, and Hispanic men are 2.5 times more likely (The Sentencing Project 2021).

Despite the wide reach of the criminal justice system, people with criminal histories continue to face barriers to employment. Unemployment is common; 60 to 75 percent of returning citizens are unemployed one year after release from incarceration (Prison Policy Initiative 2018). When justice-impacted individuals do secure employment, they are often relegated to jobs of lower quality (e.g., Western 2002; Sugie 2018). Individuals with criminal histories experience earnings penalties of 10 to 30 percent (Waldfogel 1994; Wright 2013) and are often sorted into jobs with high turnover, poor working conditions, irregular work schedules, and lower wage growth (Harding, Morenoff, and Wyse 2019; Western 2002; Bushway 1998). Racial bias only compounds the negative impact of a criminal record on employment; formerly incarcerated African American people face greater employment penalties—40 percent lower employment, 10 percent lower earnings, and 21 percent slower wage growth—compared to similar, formerly incarcerated White people (Pager 2003; Lyons and Petit 2011).

A key factor causing these adverse employment outcomes is that criminal histories expose justice-impacted individuals to employer discrimination (Pager 2003, Pager, Western, and Sugie 2009). Employers view criminal records as a “negative credential” signaling low worker quality (Grogger 1992), untrustworthiness (Waldfogel 1994), and lack of honesty (Lott 1992). Employers are thus over 50 percent less likely to hire justice-impacted individuals than comparable job applicants without a criminal record (Pager, Western, and Bonikowski 2009). Along with employer discrimination, justice-impacted individuals face further challenges in employment from legal barriers such as occupational licensing bans (Rodriguez and Avery 2016) and the erosion of human and social capital during incarceration (Kling 1999; Harding et al. 2019).

Policy-makers and researchers have sought to identify solutions to persistent employment barriers since employment is one of the strongest predictors of successful reentry. Unemployment or job instability increases the chances of reoffending (e.g., Uggen 1999; Shover 1996). Among people with criminal records, unemployed individuals are three to five times more likely to commit another crime than those who do find employment (Jackson 1990). The reentry risks of unemployment or underemployment have inspired efforts to reduce employment barriers and raise hiring prospects, through initiatives like the Fair Chance Hiring Act or “Ban-the-Box,” job training in prisons, and employment placement assistance by nonprofits and governments. Yet these efforts have neither closed the employment gap nor significantly attenuated the subsequent economic and social inequality facing returning citizens.

Given these obstinate labor market challenges, entrepreneurship is an alternative pathway to finding work and income for justice-impacted individuals. Entrepreneurship has helped other marginalized groups in the labor market (e.g., welfare recipients, people with disabilities, immigrants and refugees, women, and racial minorities) to overcome poverty and achieve economic and social mobility. ¹ This suggests that entrepreneurship could lay a legitimate path for justice-impacted individuals to secure work and achieve successful reentry, particularly in the context of limited viable labor market opportunities (Baskaran 2019; Hwang and Phillips 2020).

Recent empirical work underscores the prevalence of entrepreneurship among justice-involved individuals. Hwang and Phillips (2020) draw from the National Longitudinal Survey of Youth, a representative national-level survey from 1997 to 2015, and document that around 19 percent of formerly incarcerated individuals engage in entrepreneurship, measured as self-employment. The authors estimate that formerly incarcerated individuals are approximately 41 percent more likely to become self-employed entrepreneurs compared to similar never incarcerated individuals. ² Using linked tax return and Criminal Justice Administrative Records System (CJARS) data of five states from 2014 to 2018, Finlay, Mueller-Smith, and Street (2022) reveal similar findings that around 24 percent of individuals with criminal records reported being self-employed business owners. ³ The authors also find that justice-involved individuals are approximately 22 percent more likely to be self-employed than non-justice-involved individuals. These studies further show that particular subsets of returning citizens are even more likely to engage in entrepreneurship. For example, justice-impacted African American or Hispanic individuals and women are more likely to become self-employed business owners (Finlay et al. 2022; Hwang and Phillips 2020), suggesting intersectionality of justice involvement, race, and gender in entrepreneurial engagement.

While these findings directly establish the prevalence of entrepreneurship among individuals with criminal records, research has also focused on documenting the significant presence of returning citizens among entrepreneurs in the United States. Bushway et al. (2021) use data from a nationwide consumer and criminal background check company and estimate that around four percent of all small business owners in the United States have criminal histories (approximately 1.1 million business owners have criminal histories). ⁴ Finlay et al. (2022) find similar results that an average of 2.7 percent of all self-employed entrepreneurs among five CJARS states (ranging from 1.4 percent to 5.1 percent by state) have criminal records. These findings that individuals with criminal records represent a worthwhile portion of business owners in the United States advances the importance of considering justice-involved populations when developing policies for entrepreneurs and conducting entrepreneurship research.

Why Entrepreneurship? Underlying Mechanisms

Having established the prevalence of entrepreneurship among justice-involved individuals, scholars have further questioned the underlying mechanism as to why entrepreneurship is particularly common for individuals with criminal records. Do justice-involved people hold individual-level predispositions that make entrepreneurship more appealing than employment? Or is entrepreneurship a structural response to employment barriers for justice-involved individuals? Research provides support for both individual and structural level mechanisms.

Individual-level mechanisms—like personal predispositions—can make entrepreneurship more appealing or suitable for justice-impacted people than employment. In this view, individual characteristics or preferences that lead people to criminal activity also lead to engagement or success in entrepreneurship. Specifically, scholars suggest that both criminal activity and entrepreneurship often entail tolerance for risk, entrepreneurial ability or orientation, creativity, and a preference for autonomy (e.g., Gottschalk 2009; Fairlie 2002). ⁵ Lockwood et al. (2006) theorize that individuals who participate in criminal activities are entrepreneurs in spirit who differ from “legitimate” entrepreneurs in only one respect: their “enterprises” are illegal and socially unacceptable.

Empirical evidence supports the idea that people with criminal histories have entrepreneurial personalities or predispositions. Fairlie (2002) finds that prior drug dealers are more likely to undertake entrepreneurship and theorizes that drug dealers possess unobserved characteristics that are positively associated with self-employment, like low risk aversion, high entrepreneurial ability, and a preference for autonomy. Levine and Rubinstein (2017) also find evidence that individuals who engage in illicit activities are more likely to subsequently start and succeed in incorporated businesses (but not unincorporated businesses) and theorize that this is due to their strong nonroutine cognitive skills. ⁶ Rieple (1998) finds direct evidence that people with criminal records have higher entrepreneurial potential than other groups, such as civil servants or nurses. In Rieple’s study, people with criminal records score higher across five empirical measures of entrepreneurial personality characteristics: risk taking, creativity, internal locus of control, need for achievement, need for independence, and autonomy. ⁷ Similarly, Sonfield, Lussier, and Barbato (2001) document that formerly incarcerated individuals show greater than average entrepreneurial propensity along with high motivational factors associated with entrepreneurial success; the group attains the highest scores except for entrepreneurs in high-growth firms. ⁸

Along with individual-level mechanisms, structural mechanisms frame entrepreneurship as a response to the lack of viable employment opportunities brought about by employer stigma, legal barriers, and the depreciation of human capital and social capital. For example, classic sociological approaches to entrepreneurship have emphasized that limited opportunities in employment increase the likelihood of undertaking entrepreneurship as a means of securing work and income (Stinchcombe 1965). Scholars have identified key populations such as immigrants (Light 1979; Lippman, Davis, and Aldrich 2005), women (Thébaud 2015), and racial minorities (Bates and Bates 1997, Bates 2011) that engage in entrepreneurship due to blocked opportunities in employment. In this context, entrepreneurship can help justice-impacted people overcome and circumvent unemployment or underemployment, as it has for other populations excluded from conventional labor market opportunities.

Hwang and Phillips (2020) theorize and empirically verify employment barriers as a key mechanism driving returning citizens to entrepreneurship, controlling for individual-level differences. Their study uses geographical differences in the severity of employer discrimination for individuals with criminal records—as proxied by the implementation of the Ban-the-Box policy—to show that formerly incarcerated are more likely to become self-employed business owners as the severity of labor market discrimination increases. ⁹ Ban-the-Box aims to mitigate employer discrimination by preventing employers from conducting criminal background checks until later in the hiring process (Avery and Hernandez 2019). Formerly incarcerated people are more likely to enter entrepreneurship when the Ban-the-Box policy is not implemented in their jurisdiction of residence. This suggests that many formerly incarcerated individuals pursue entrepreneurship to overcome employer discrimination based on criminal records. Moreover, the authors find an even stronger effect on formerly incarcerated African American individuals, the group who experience the greatest discrimination in the absence of Ban-the-Box laws. These findings indicate that the varying severity of labor market discrimination based on criminal histories directs entrepreneurship rates among justice-impacted individuals.

Disentangling the underlying mechanism of why justice-involved individuals engage in entrepreneurship has important implications for developing policies around reentry for returning citizens. The individual-level mechanism lends support to policies promoting entrepreneurship for individuals with criminal records as a way to utilize their entrepreneurial preferences and skillsets. For example, Fairlie (2002) suggests the expansion of entrepreneurial training programs to “exploit the entrepreneurial talents of street-wise hustlers and dope-dealers in the inner city to enable them to become managers and owners of legitimate inner-city businesses” (see also Myers 1989). Yet the structural mechanism suggests a more delicate balance between initiatives to subsidize entrepreneurship and policies to reduce employment discrimination for justice-involved individuals. While promoting entrepreneurial education and lowering barriers to entrepreneurship help justice-involved individuals who are pushed into entrepreneurship, such efforts should be pursued in tandem with policies aimed at improving employment to reduce the structural forces that push justice-involved individuals into entrepreneurship in the first place.

Impact of Entrepreneurship: Income, Economic Mobility, and Recidivism

Although entrepreneurship is a prevalent route for justice-impacted individuals, few studies address its social and economic outcomes. Instead, most research has focused on how employment impacts income, recidivism, and long-term economic mobility among justice-involved people. Scholars in this stream of work have found that while individuals with criminal records face lower income and stunted economic and social mobility compared to individuals without criminal records (Western 2002; Harding et al. 2019), stable employment helps justice-involved individuals achieve successful reentry through economic and social integration (Uggen 1999; Shover 1996). Nascent research suggests that entrepreneurship can lead to similar or, at times, improved outcomes compared to employment for justice-impacted individuals in terms of higher earnings, lower recidivism, and long-term economic mobility.

Recent research suggests that people with criminal records can achieve improved earnings in entrepreneurship compared to other alternatives they face in the labor market: unemployment and underemployment. Scholars such as Rieple (1998) theoretically argue that because work itself is hard to find for justice-involved individuals due to lack of skills and employer discrimination, entrepreneurship provides justice-involved individuals with a legitimate means to avoid unemployment and earn income. Hwang and Phillips (2020) further argue that entrepreneurship offers justice-impacted individuals the opportunity to achieve higher earnings and economic mobility compared to not only unemployment but also employment. Unlike employees whose earnings depend on employers’ valuation of their potential ability, entrepreneurs are often more likely to earn as a function of their own ability (Hegde and Tumilson 2018). Therefore, for justice-involved individuals, who are more likely to be stigmatized and undervalued by employers, entrepreneurship offers an opportunity to earn competitive earnings without having to rely on or be hindered by employers’ negative perceptions (Hwang and Phillips 2020). This aligns with theories and findings focusing on other marginalized populations. For example, African American entrepreneurs are more likely to move into higher income groups than are African American nonentrepreneurs; they are as likely, in fact, to do so as White entrepreneurs (Bradford 2014). ¹⁰ Relatedly, the economic success of immigrant groups, such as Koreans, Jews, and Italians, has been found to be in part due to their engagement in entrepreneurship (e.g., Light 1979; Bonacich and Modell 1980).

Hwang and Phillips (2020) provide the first set of supportive empirical evidence that formerly incarcerated individuals earn higher income in entrepreneurship compared to wage employment. The authors estimate that while the median formerly incarcerated employee earns an annual income of $10,080, similar formerly incarcerated entrepreneurs earn 24 percent more, with an annual income of approximately $12,460. ¹¹ The findings further show that entrepreneurship helps reduce the income penalty faced by formerly incarcerated people by almost 50 percent. While formerly incarcerated employees earn approximately $4,390 less annually than similar employees who have never been incarcerated, formerly incarcerated entrepreneurs earn approximately $2,160 less annually than similar entrepreneurs who have never been incarcerated. In addition to the immediate economic outcomes of entrepreneurship, Hwang (2021b) shows that entrepreneurship helps formerly incarcerated individuals achieve long-term economic integration and mobility, by providing opportunities to gain work experience that they can leverage to secure subsequent employment. The author further shows that successful entrepreneurship allows formerly incarcerated individuals to move beyond the poverty line; similar employment, along with unsuccessful entrepreneurship, is less likely to facilitate such upward mobility. ¹²

Although entrepreneurship can help mitigate economic inequality to some extent, the income gap between those with and without criminal records still persists for entrepreneurs. For example, Hwang and Phillips (2020) find that while the income gap between formerly incarcerated individuals and never incarcerated individuals is significantly reduced for entrepreneurs, formerly incarcerated entrepreneurs still earn 6.1 percent less annually than never-incarcerated entrepreneurs. This can partly be driven by the fact that returning citizens are less likely to engage in growth-oriented opportunity entrepreneurship and resort to types of entrepreneurship that offer minimal relief to perilous financial conditions (Baskaran 2019). Finlay et al. (2022) show that justice-involved individuals are more likely to start businesses in industries such as construction, waste management, or other services; and less likely in professional, scientific and technical services, or retail trade industries compared to non-justice-involved individuals. Hwang (2021a) finds similar results and further documents that returning citizens most often start businesses in industries that require low levels of capital—like bakeries, tailor shops, and cleaning services—and least often in high-capital industries such as finance, manufacturing, mining, real estate, and insurance. These differences likely stem from critical barriers to entrepreneurship, which I will discuss in the next section.

In addition to income and economic mobility, another important outcome of interest is how entrepreneurship impacts recidivism or desistance from criminal activities. Research has established employment or work as strong predictors of desistance from crime (Shover 1996; Sampson and Laub 1997; Uggen 2000; Bushway and Reuter 2002). Employment provides immediate financial support but also increases future expected earnings; this significantly increases the opportunity cost of criminal behavior, thereby reducing the likelihood of reoffending (Pezzin 1995). Furthermore, studies find that personal fulfillment from “rewarding work” diminishes the likelihood of recidivism (Maruna 2001), even beyond employment’s financial aspect (Uggen 1999).

Research has started to explore how entrepreneurship impacts recidivism. The first set of studies examines how entrepreneurial training programs—rather than entrepreneurship—help reduce recidivism among justice-impacted individuals (e.g., Sonfield 2013; Hill 2022; Sauers 2009). For example, Texas’s Prison Entrepreneurship Program (PEP), a reentry program inside prisons with a focus on entrepreneurship, has trained over 2,600 formerly incarcerated individuals. It has led to the foundation of over 500 businesses and achieved an 8.3 percent recidivism rate versus a national average of nearly 50 percent (Prison Entrepreneurship Program 2020). Anecdotal evidence from other entrepreneurial training programs such as Defy Ventures, which achieved a recidivism rate of 7.2 percent, further suggests a positive impact of entrepreneurship training on reducing recidivism. ¹³ Hill (2022) addresses potential selection issues due to intense recruitment processes for such programs by utilizing randomized control trials and a quasi-natural experiment in Texas’s PEP, and establishes that entrepreneurial training causally reduces three-year recidivism rates by 12 percent. Yet entrepreneurial training programs offer multifaceted reentry assistance beyond entrepreneurship, such as better living conditions, character development, and communication skills (Hill 2022), making it challenging to infer conclusions as to whether reductions in recidivism owe to entrepreneurship or to training and assistance independent of the actual launch of a business.

Recent studies have addressed these challenges and found both direct and indirect supportive evidence that entrepreneurship helps prevent justice-involved individuals from reengaging in criminal activities. Hwang and Phillips (2020) find direct supportive evidence that entrepreneurship helps prevent justice-impacted individuals from reengaging in criminal activities, compared to both unemployment and wage employment. The authors theorize that entrepreneurship not only provides greater economic incentives to desist from crime through higher earnings, but also provides crucial social and psychological incentives like self-esteem, work satisfaction, commitment, and responsibility. Their results show that while formerly incarcerated individuals who are unemployed face a 45.6 percent five-year recidivism rate, entrepreneurship decreases the recidivism rate by 13.5 percentage points (30 percent decrease), while employment decreases the recidivism rate by 7.9 percentage points (17 percent decrease). Entrepreneurship particularly reduces recidivism rates for formerly incarcerated African American individuals, further supporting the notion that entrepreneurship is most helpful for those facing the greatest discrimination in the labor market.

Kacperczyk and Rocha (2021) provide indirect evidence at the community level that initiatives to foster entrepreneurship can lead to reduced community crime rates. The authors theorize that when marginalized individuals at risk of criminal behavior engage in entrepreneurship, they will achieve greater economic and social integration and, thus, desist from crime. While this study does not directly observe entrepreneurship or recidivism at the individual level and theorizes more broadly about individuals at risk of committing crimes, rather than justice-involved individuals, the results provide additional indirect empirical evidence that engaging in entrepreneurship can lead to desistance from crime.

Barriers and Challenges of Entrepreneurship for the Justice-Involved Population

The positive outcomes of entrepreneurship for justice-involved individuals, in terms of income, economic mobility, and recidivism, advance entrepreneurship as an attractive way forward for this population. Yet opportunities to become a successful entrepreneur are not evenly distributed across population groups. Factors that are critical for successfully starting and sustaining a business, such as financial capital, human capital, and social or cultural capital, are disproportionately accessible to those who are already advantaged and lead to barriers to entrepreneurship for those who lack access (Kim, Aldrich, and Keister 2006; Renzulli, Aldrich, and Moody 2000). Scholars have further theorized that groups who are disadvantaged and marginalized in employment typically also face barriers to accessing such necessary resources, leading to marginalization in entrepreneurship as well (e.g., Thébaud and Sharkey 2016; Fairlie and Robb 2007). Therefore, it is imperative to address the potential barriers and challenges to entrepreneurship that justice-involved individuals face, in order to assess the viability of entrepreneurship as well as outline robust policy implications.

Recent research shows that individuals with criminal records face significant barriers to entrepreneurship, in terms of financial challenges as well as the lack of human or social capital (e.g., Barr 2015; Baskaran 2019). These sources of entrepreneurial barriers are similar to those of other marginalized groups such as women (e.g., Renzulli et al. 2000; Kim et al. 2006; Chang 2010) and racial minorities (e.g., Bates 1997; Parker 2009). Women are less likely to become entrepreneurs, particularly successful entrepreneurs, due to barriers to accruing human capital such as prior managerial or start-up experience (Jennings and Cash 2006); social capital such as business networks (Renzulli et al. 2000); and financial capital such as equity and debt financing from venture capitalists, angel investors, and banks (Thébaud and Sharkey 2016). Racial minorities are also underrepresented in entrepreneurship due to marginalization and discrimination in the entrepreneurial process, particularly access to wealth (Fairlie and Robb 2007; Lofstrom et al. 2014) and financial capital (Blanchflower, Levine, and Zimmerman 2003; Chatterji and Seamans 2012). In what follows, I specifically highlight recent findings on the three sources of entrepreneurial barriers for the justice-involved individuals: financial capital, human capital, and social capital.

First, limited access to financial capital or funding is a primary obstacle facing justice-impacted entrepreneurs. Funding, which is essential for starting and sustaining a business, can come from diverse sources, including personal funds, money from family and friends, credit cards, commercial bank loans, or government funds. Yet these sources are rarely easily accessible to disadvantaged social groups (see Barr [2015] for review), including justice-involved individuals. When it comes to securing financing from commercial banks, justice-impacted individuals often face obstacles to securing debt caused by the mark of criminal history and the collateral consequences of incarceration (Baskaran 2019). Commercial lenders may have stereotypes about the ability of justice-impacted entrepreneurs to succeed, as has been found for African American– and Hispanic-owned businesses (Blanchard, Zhao, and Yinger 2005). Moreover, people who have been incarcerated are more likely to have insufficient credit scores and interruption in work histories, both of which negatively impact the likelihood of qualifying for bank loans (Aneja and Avenacio-Leon 2017). Justice-impacted individuals are also less likely to apply for bank loans than non-justice-impacted business owners because of their fear of rejection (Rieple 1998), a trend also observed among minority business owners. Compared with nonminorities, African Americans are 37 percent more likely and Hispanics are 23 percent more likely to avoid applying for credit owing to fear of rejection (Bates and Robb 2013).

People with criminal histories also face challenges gaining federal support or loans from government agencies. For example, the Small Business Association (SBA), an important source of financing for many entrepreneurs, has a long history of imposing restrictions on loans and other aids to business owners with criminal records (Bushway et al. 2021). Only in 2015 did the SBA Microloan Program change its criteria to allow loan applications from people on parole or probation (Baskaran 2019). ¹⁴ More recently, the Paycheck Protection Program (PPP), designed to help small businesses secure loans from the SBA through the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, originally disqualified businesses whose owners had recent criminal histories. ¹⁵ Finlay et al. (2022) find that nearly 3 percent of business owners among the five states in CJARS were ineligible for the PPP program due to justice involvement; this ineligibility was particularly pronounced for African American and Hispanic men. Bushway et al. (2021) provide smaller estimates that the original PPP restriction disqualified up to 212,655 small businesses (0.47 percent of all businesses) whose owners had recent criminal histories. The authors highlight the collateral negative impact of the original PPP restrictions by documenting that the restrictions impacted not only justice-involved business owners but also as many as 343,198 employees working for such businesses (Bushway et al. 2021).

Hwang (2021a) finds similar results that aspiring formerly incarcerated entrepreneurs are more than 55 percent less likely to obtain financial capital through either financial institutions or the government compared to similar non-formerly incarcerated entrepreneurs. In particular, formerly incarcerated African American and Hispanic entrepreneurs have the lowest rates of gaining capital from financial institutions or the government, suggesting that the intersection of minority race and incarceration causes further challenges. Hwang provides both qualitative and quantitative evidence that as a response to such financial barriers, many formerly incarcerated people resort to their personal savings or family and friends for the capital to start new businesses. Yet, as is the case for minority-owned businesses, such personal savings and funding from family and friends is often constrained for justice-involved individuals due to poverty and low income levels, both of which limit their access to money (Robb 2013; Baskaran 2019). As a result, formerly incarcerated individuals start businesses in industries that require minimal start-up capital and no physical office, such as construction or services, as opposed to capital-intensive industries such as mining, manufacturing, or finance, insurance, and real estate (Hwang 2021a).

Second, justice-involved individuals typically lack the human capital necessary for entrepreneurship. While formal education allows individuals to gain knowledge and skills to facilitate business formation (Kim et al. 2006), justice-involved individuals often lack formal education or schooling due to incarceration (Baskaran 2019). Ewert, Sykes, and Petit (2014) find that among individuals in local, state, or federal correctional facilities, more than 55.7 percent had less than a high school diploma, and less than 12.9 percent had some college education in the year 2010. The lack of education is particularly pronounced for African American justice-involved individuals, where more than 61.8 percent had less than a high school diploma and only 7.7 percent received some college education in the year 2010. Therefore, the lack of formal education can hinder justice-involved individuals from successfully launching a business, especially in knowledge-based industries. Instead, individuals with criminal records start businesses in industries such as construction (Hwang 2021a; Finlay et al. 2022), where there is less need for advanced formal education (Kim et al. 2006).

In addition to formal education, people with criminal records have few opportunities to learn essential business skills such as economic literacy, skills in finance and accounting, and business planning skills necessary to lead a business to survive and grow (Baskaran 2019; Rieple 1998). Previous research shows that work experience, particularly general full-time work experience and managerial experience, is one of the most important components of human capital for entrepreneurs (Kim et al. 2006; Shane 2003). As justice-involved individuals face even greater barriers to employment, they are often blocked from acquiring necessary work experience, particularly full-time or managerial experience, that provides opportunities for human capital accrual (Harding et al. 2019). Thus, marginalization in the conventional employment market has a spillover effect of raising barriers to succeeding in entrepreneurship for the justice-involved population.

Finally, justice-impacted individuals face entrepreneurial challenges due to insufficient social or cultural capital. Limited education and work experience as well as time spent inside prisons or jails lead justice-involved individuals to often lack access to role models or suitable business networks for peer support, investment, and business opportunities (Barr 2015; Rieple 1998). While peers and mentors from work and school are found to be the most influential sources of social capital in entrepreneurial endeavors (Lerner and Malmendier 2013; Nanda and Sørensen 2010), again, the lack of formal education and work experience stunt the accumulation of such social capital. Family network, particularly parents, is another main source of social and cultural capital; children of entrepreneurs are more likely to engage in entrepreneurship in their adult careers (Renzulli et al. 2000). While there are no studies on intergenerational transmission of business ownership among justice-involved individuals, studies on African American populations, which constitute almost 40 percent of the justice-involved population, find that the lack of family businesses leads to negative business outcomes (Fairlie and Robb 2007). As this is only indirect evidence, this calls for more research on how social capital, or the lack thereof, from parents or broader family connections, impacts entrepreneurial outcomes for justice-involved individuals.

Conclusion and Policy Implications

Finding work is crucial to the reentry process, and researchers, policy-makers, and government agencies have long focused on programs and policies to help justice-impacted people find work in wage employment. Yet the rising prevalence of entrepreneurship among people with criminal records—along with its positive consequences—suggests entrepreneurship can be an additional viable pathway to successful reentry. Entrepreneurship for justice-involved individuals, however, is still a nascent conception and thus calls for more attention on how to support entrepreneurship among returning citizens by addressing and mitigating the barriers and challenges.

Primarily, government efforts should mitigate financial barriers to entrepreneurship for people with criminal histories. Reexamination—or elimination—of restrictions on government loans to people with criminal records could help. For example, following pushback from researchers (e.g., Finlay et al. 2022), policy-makers, and advocacy groups, the SBA narrowed the scope of the original PPP restrictions—which disqualified anyone convicted of a felony within the past five years—to only those convicted of a felony in the past year. ¹⁶ Under the revised 2021 PPP restrictions, the number of businesses ineligible for PPP loans dropped by 95 percent (from 212,655 to 11,481 businesses), helping an additional 326,000 employees benefit from the program (Bushway et al. 2021). As government support such as the PPP can be an important lifeline for business owners with criminal records, who often lack other sources of financial support, limiting or eliminating widespread criminal disqualifications can help returning citizens start and sustain their businesses.

Lowering the barriers to capital access from financial institutions, such as banks, credit cards, and venture capitalists, can be a more challenging but important next step. While there are multiple reasons why financial institutions are less likely to provide loans to returning citizens, one of the main drivers is discrimination in the lending market (Hwang 2021a). Therefore, efforts such as improving training for internal loan review practices in financial institutions can be helpful. Other endeavors to ban or restrict access to certain criminal histories when reviewing for loans, as a parallel to the Ban-the-Box policy for employers, can be something to be considered by policy makers and financial institutions (but, please see a discussion of unintended negative side effects of Ban-the-Box policy in Agan and Starr [2018] and Doleac and Hansen [2020]). Furthermore, because much of the financial barriers derive from the intersection of racial minorities and criminal histories, additional oversight to address discrimination against racial minorities is necessary.

We also need efforts to provide returning citizens with essential human capital for entrepreneurship. Returning citizens often report challenges due to the lack of knowledge around applying for a loan, incorporation, accounting, financial literacy, tax filings, as well as management and leadership skills when aspiring to start their own businesses (Rieple 1998). Therefore, government agencies can aim to create new avenues for returning citizens to obtain entrepreneurial training, receive support services, and connect with funding opportunities to launch their businesses. Some recent policy initiatives, like the NEW START Act of 2019, endeavor to provide formerly incarcerated individuals with entrepreneurial development assistance, including the disbursement of microloans. ¹⁷ The SBA is also collaborating with foundations such as Aspire Entrepreneurship Initiative (AEI), which provides “entrepreneurial education and microloans for formerly incarcerated individuals, with a specific focus on those who are parents.” While there has also been an increase of prison entrepreneurship training initiatives such as Texas’s PEP and joint programs with nonprofits or universities such as Columbia University or Georgetown University, these programs are only available in a handful of prisons or jails in the United States. Efforts to provide more systematic, widespread, and continuous entrepreneurial training inside prisons can help address the lack of human capital.

Initiatives to help returning citizens build social capital to start and succeed in entrepreneurship can address the lack of connections to mentors, fellow entrepreneurs, customers, investors, and potential business partners. Programs such as Defy Ventures and Inmates to Entrepreneurs not only provide microloans and training but also facilitate connections to a cohort of aspiring entrepreneurs with criminal records, mentors, and angel investors. Therefore, initiatives to expand such programs that provide access to valuable social connections can be fruitful for justice-impacted individuals, who are often blocked from opportunities to build such networks. While these programs currently rely on private sector investors, venture capital funds, and business executives, such programs could benefit from funding from federal and local governments.

Along with the expansion of reentry training programs for aspiring entrepreneurs, organizations, along with government agencies and program partners, must all respond to the unique needs and challenges of the justice-impacted population (The Council of State Governments 2005). In addition to common difficulties faced by disadvantaged populations, returning citizens frequently encounter challenges in health care, housing, transportation, drug abuse, and childcare (Reichert, Powers, and Skorek 2016). The best entrepreneurial training programs will likely be those that also provide wraparound services to ensure successful reentry.

Finally, while initiatives to promote and subsidize entrepreneurship as an alternative pathway for justice-impacted individuals is important, it is essential to achieve a balance with more traditional efforts to aid employment for returning citizens. One of the fundamental reasons why entrepreneurship is prevalent among justice-impacted individuals stems from the persistent structural barriers to employment. For individuals with criminal records who are forced into entrepreneurship as a last resort, improving employment opportunities can be more desirable than entrepreneurial subsidies. Therefore, along with policies and programs to make entrepreneurship more accessible as a career choice for justice-involved individuals, there is a need for continuous efforts to address ongoing employment barriers and discrimination.