Sunday, May 29, 2011

29/05/11: Older workers and entrepreneurship

A good friend today raised an interesting question/issue - do older cohorts of workers offer entrepreneurship potential or is entrepreneurship a predominant domain for the younger cohorts?

There are several anecdotal or conventional ways of dealing with this question.

First, as Western populations age, even statistically the average age of entrepreneurs can be expected to increase. Second, the rapid rise of new technologies and new media suggest that younger generations now hold the key to future entrepreneurship. Third, again, as Western societies age and the age of statutory retirements is pushed back, entrepreneurship among older generations can be expected to rise for those who would tend to leave their workplace to start new business before the retirement, but decline for those who would normally start business after retirement.

Thus, despite conventional perceptions that all new entrepreneurs seem to be young ICT leaders, the economic reasoning would suggest that the answer to the question above can go both ways.

As far as evidence goes, US-based Ewing Marion Kauffman Foundation - a seasoned research think tank into entrepreneurship - recently (June 2009) published an intriguing study titled The Coming Entrepreneurship Boom, authored by Dane Stangler. The study is available here.

The main conclusions of the study are:
  • Several facts have emerged in the course of Kauffman Foundation research that indicate the United States might be on the cusp of an entrepreneurship boom—not in spite of an aging population but because of it:
  • As the economic recession plagues the job market, more and more "baby-boomers" are becoming entrepreneurs
  • The decline of lifetime employment, the experience and knowledge of the age group, longer lifespan, and the effect of the current recession are all factors contributing to the increase in entrepreneurial activity in the baby boom generation
  • Key findings: In every single year from 1996 to 2007, Americans between the ages of 55 and 64 had a higher rate of entrepreneurial activity than those aged 20-34, averaging a rate of entrepreneurial activity roughly one-third larger than their youngest counterparts
  • The 20-34 age bracket has the lowest rate of entrepreneurial activity
  • Long-term employment has fallen dramatically for people ages 35-64 over the past fifty years
  • With longer life expectancies and greater health in later life, older generations may continue to start new firms—or mentor young entrepreneurs
  • Since the first Internet-era recession, transaction costs and barriers to entry have fallen for entrepreneurs of every age
  • The larger effects of the recession and economic trends—away from lifetime jobs and toward more new companies—will gain even greater cultural traction in favor of entrepreneurship by the older workers
  • Emerging regulations aiming to prevent the rise of too-big-to-fail organizations also may help create a more market-oriented society. "We will see increasing numbers of new, smaller firms as they compete and cooperate; challenge incumbents; and, perhaps, rise and fall at faster rates", says the author.
This is a fascinating debate. Much of evidence suggests that even among immigrants to the US, entrepreneurship takes time to evolve, with the average tenure in the US for a non-US born entrepreneur being 13 years (see another study here). Again, this too suggests that older cohorts of workers represent significant pool of potential entrepreneurs.

Of course, one cannot make the same direct comparatives to the EU, where pension benefits are often much stronger, the market pricing of risks for entrepreneurs are much more distorted, returns to entrepreneurship are more restricted and overall culture of risk taking is less developed (except, as we have now learned, for the too-big-to-fail banks, of course).


Jason Loughrey said...

The 'popularly held assumption' of the 'swashbuckling and risk-taking youth' is a problem so. There is a probably an overemphasis on risk. Perhaps a false perception that entrepreneurs seek risk when in fact entrepreneurs have the incentive to minimize risk. This is something that older people are perhaps better in doing than younger people given the same information and skills. Of course these incentives are distorted to a great extent when the possibility of losses are eliminated. A reduced appetite for risk might not be a bad thing. It is about first coming up with the idea and then minimizing the risk exposure before entering the market.

TrueEconomics said...

Good point, Jason. In fact research from Kauffman Foundation also shows that when it comes to, for example, investment decisions, there is no difference between entrepreneurs and ordinary investors - so no risk-preference or higher risk-tolerance for the former. Although, entrepreneurs do take more risk & leverage in own business investment. In a sense, it all depends on types of risk. Entrepreneurs do sick to manage (not minimize, necessarily) risk in terms of financials, but they by definition take more risk than an ordinary salaried worker, as they elect non-salaried pay and leave good employment to seek higher returns. In addition, in Ireland, entrepreneurs also risk losing social benefits in the case of long unemployment spell as they cannot avail of unemployment benefits. Lastly, they risk bankruptcy, which in Europe is prohibitive. So by definition, entrepreneurs have higher tolerance for risk when it comes to business risk and personal income risk.

Jason Loughrey said...

Good points on the social benefits and bankruptcy laws. Policy in these areas could be improved to reduce risk for entrepreneurs. This combined with a better understanding about entrepreneurship and the risk management by entrepreneurs could improve things in general.

TrueEconomics said...

True. Sadly, we have just done the exact opposite of this with the new Universal Social Charge which taxes self-employed for social insurance to which they are not entitled. Perverse!