The Effect of Microenterprises on Poverty: A Cross-county Analysis on US Urban Poverty

Purpose: This paper empirically tests the effectiveness of microenterprises among other factors as an economic development strategy/tool for the alleviation of poverty in the urban counties of US. Methodology: The conceptual framework is based on a poverty estimation model for the U.S.constructed by Levernier et al.(2000). This model is expanded by adding two microenterprise variables; non-employers and establishments with 1-4 employees, as determinants of the U.S.urban poverty rate at the county level. These two variables are considered for testing their hypothesized negative association with poverty rate across urban counties. Findings: The estimation results show that non-employer microenterprise is less effective in reducing poverty in all of the spatial dimensions except for suburban counties. However, microenterprise with 1-4 employees is clearly an effective option in reducing urban poverty. It is also found that spatial dependency bias is present and therefore corrected. Because of positive association of non-employers with the poverty rate, a separate model is constructed for non-employers to measure its effect on income inequality. The results show non-employers are positively related to income inequality as well. Recommendations: Nevertheless, this result does not necessarily indicate non-employers perform unsatisfactorily and nor does it mean to discourage them.