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).

Economics 27/9/10: Some evidence on entrepreneurship from the US

An interesting study of proprietorship and entrepreneurship from the US used 19 years worth of data (1989-2007) from the Survey of Consumer Finances in the US, to addresses three questions:

1. Are business owners generally more or less financially conservative than their non-business-owning counterparts?
2. Do business owners accumulate more wealth?
3. Do business owners hold a smaller share of their financial assets in risky stock holdings?

The study: BUSINESS OWNERS, FINANCIAL RISK, AND WEALTH by Tami Gurley-Calvez Bureau of Business and Economic Research Department of Economics College of Business and Economics West Virginia University (July 2010 (link) Ewing Marion Kauffman Foundation)

The motivation for these questions is straightforward: “If households that own businesses are investing more heavily in relatively safe assets, then policies that reduce financial risk (such as the availability of high-yield certificate of deposit accounts) might spur business ownership among high ability households with lower risk tolerances. Alternatively, business owners may not view their ventures as risky due to asymmetric information or perceptions of their projects. In this case, policies that facilitate the ability to assess the profitability of business ownership, such as a transparent patent process and systems of regulation and taxation, would be better suited for promoting growth in business ownership.”

Results indicate that business owners are

• financially conservative based on borrowing and savings questions
• but are more likely to be willing to assume above-average risk for financial gain,
• consistent with other studies findings that entrepreneurs save more, business owners accumulate more wealth over time;
• however, business owners and non-business owners invest similar shares of their financial portfolios in safe assets.
  

So business owners are more risk averse in their own business ventures, but are about as risk averse in terms of their investment portfolios allocations as the rest of us.

“Taken together, the results suggest that policies aimed at increasing business ownership should focus on helping households identify high-value business opportunities through transparent tax, legal, and regulatory systems. Efforts to reduce risk should focus on the business venture, such as full loss offsets, rather than focusing on reductions in other financial risks.” (emphasis is mine).

Some interesting factoids that the study throws:

• A massive 12.26% of US households own businesses.
• Business owners are underrepresented in the lower income categories, making up about 3% and 5% of the lowest and second-lowest income quintiles, respectively.
• At the upper end of the income distribution, business owners account for 18% of households in the 80th-90th percentile range and 37% of households in the 90th-100th percentile range.
• Business owners comprise 2% of the lowest quarter of the wealth distribution and 43% of households in the 90th to 100th wealth percentile range.
  

But things are not changing much over time. Per authors: “These results are consistent with Gentry and Hubbard (2004) who report that entrepreneurs account for 11.5 percent of the population in 1989 using the same definition

This, however, is a function to some extent of the fact that business owners earn higher incomes and accumulate more wealth, meaning they are unlikely to stay in lower incomes/wealth percentiles even if they start from there.

“Business owners have higher mean and median income levels. The median income for business owners is $87,000, whereas the median for households not owning businesses is $42,000. Likewise, business owners have more assets and net worth overall and by income category. Business owners have a median net worth of $497,000, and non-business owners have a median net worth of $94,000. The difference is large but the ratio of median net worth for business owners to median net worth for non-business owners of 5.29 is lower than the 8.03 ratio calculated from Gentry and Hubbard (2004) using 1989 SCF data.”

So the last figure suggests that over time, the wealth gap with non-business owners is shrinking. Undoubtedly, a housing bubble helped here.

Economics 07/02/2010: Human Capital, Immigrants and Social safety Nets

A very interesting piece of research that tends to support my view that higher minimum wages and more extensive welfare nets / social services nets are acting to reduce overall levels of productivity amongst the immigrants.

One paper, published this week, titled Indian Entrepreneurial Success in the US, Canada and the UK, by Robert W. Fairlie - University of California, Santa Cruz, Harry Krashinsky - University of Toronto, Julie Zissimopoulos – RAND and Krishna B. Kumar – RAND (available here) takes a look at the differences in entrepreneurship (incidence and outcomes) and education amongst one large sub-group of immigrants to the US, UK and Canada. Having a culturally homogenous and relatively large group of immigrants allows the authors to set aside the need for measuring sending country attributes, thus improving substantially the accuracy of their results.

What they found is pretty interesting.

Indian immigrants in the US and other wealthy countries are successful in entrepreneurship. But how successful these entrepreneurs are once they reach different countries and encounter different social systems, and what are the sources of their success?

The study finds that “in the US Indian entrepreneurs have average business income that is substantially higher than the national average and is higher than any other immigrant group. High levels of education among Indian immigrants in the US are responsible for nearly half of the higher level of entrepreneurial earnings while industry differences explain an additional 10 percent. In Canada, Indian entrepreneurs have average earnings slightly below the national average but they are more likely to hire employees, as are their counterparts in the US and UK. The Indian educational advantage is smaller in Canada and the UK contributing less to their entrepreneurial success.”

Hmmm… why so, you might ask?

Immigrants are most likely to enter both the US and UK as ‘family sponsored.’ Since the 1960s U.S. immigration policy has strongly favored family reunification. The UK’s immigration policies over the past four decades have shifted towards emphasizing family reunification and employment. On the other hand, Canada's point-based system which awards immigration admission points based on education, language ability (English or French), years of experience in a managerial, professional or technical occupation, age, arranged employment in Canada, and other factors leads to more skilled immigrants compared to the US.

So far so good – Canada has longer lasting and much more selective immigration policies than the US and UK.

Because of the point-based system, in Canada, roughly half of all immigrants are admitted through employment-based preferences. In contrast, slightly more than 10 percent of immigrants in the US are admitted under this classification.

Again, sounds like Canada should be really the land of entrepreneurial and higher quality immigrants.

The related category of employment creation or investors who face minimum net worth and business experience requirements, and self-employed immigrants who must have relevant experience in occupations. A larger (but still relatively small – just 7%) share of immigrants in Canada are admitted under these policies than in the US (0.1%) and UK (2.4%).

So, ex-ante data analysis, it is pretty clear that “Canada's point-based immigration system results in a higher share of employment-based immigrants compared to the US and UK. On the other hand, the UK admits a much higher share of immigrants under its refugee and asylee programs than the US or Canada. All else equal, we would expect skill levels of immigrants to be the highest in Canada and the lowest in the UK.” (emphasis is mine)

In other words: the authors “find some evidence that the educational advantage of Asian immigrants compared to the national average is lower in the UK than in the US, [consistent with differences in immigration policies]. But, we also find that the educational advantage in the US is higher than it is in Canada, which runs counter to the greater emphasis of Canada's immigration policy on rewarding points for the general skill level of immigrants.”


Why? “A more generous redistribution system, more egalitarian earnings, and other institutional and structural factors, however, may make Canada less attractive to higher skilled immigrants such as Indian immigrants.”

Boy, this is some statement – especially considering the EU policies to achieve ‘Social’ economy – economy based on greater earnings equality, greater rights-based outcomes equalization and maintaining a very generous welfare and redistribution systems. And this is serious, folks. Canada, US and UK are much younger – demographically – societies than EU-core states. This means that in general, the EU has a much more acute need to import younger entrepreneurial talent and skills in order to pay even comparable welfare rates to those in Canada, US and UK. Let alone to afford a more generous system of benefits. The prospects of this happening are not that good, folks.


Let us get back to the study, though:

“We find that Indian entrepreneurs are much more successful than the national average in the US. Indian businesses also perform well in Canada and the UK, but the evidence is not as strong. In the US, Indian entrepreneurs earn 60 percent more than white entrepreneurs and have the highest average business income of any immigrant group.”

No, wait – income inequality is actually favoring ethnic minorities in the US? Without an EU-styled rights legislation that polices allocations of income to specific ethnic groups? Who would have thought that to be possible!

“Estimates from business-level data sources also indicate that Indian firms have higher profits, hire more employees, and have lower failure rates than the average for all U.S. firms.”

Ouch - higher profits = hire more workers + have lower failure rates? And all without help of SIPTU/ICTU/etc to protect the interests of workers and to curb profiteering? Who could have thought?


But what drives such astounding results?

“To explain to relative success of Indian entrepreneurs we focus on the role of human capital. ...We test the hypothesis that a highly-educated Indian entrepreneurial-force is responsible for their superior performance in business. Indian immigrants in all three countries have education levels that are higher than the national average, and in the US the education levels of Indian immigrants are particularly high relative to the entire population. In the US, 68 percent of Indian entrepreneurs have a college education which is twice the rate for whites or the national average. Some of the variation in the education of Indian immigrants across the US, Canada and UK is likely due to immigration policy. Another possibility is that the higher returns to education in the US result in a more selective immigrant pool in the US compared to Canada and the UK.”

Bu wait – ‘higher returns to education’ = greater income inequality between educated and non-educated. Again, who could have thought that this might be a good thing, especially for a ‘knowledge economy’?

“When we examine business income, we find large, positive effects of education in the US and Canada. We also find large positive effects of education on employment in Canada, but smaller positive effects in the UK. The findings for education imply that the relatively high levels of education among Indian entrepreneurs have a large effect on business performance at least in the US and Canada. Decomposition estimates provide exact estimates of the contribution of higher levels of education among Indian entrepreneurs to their higher business incomes and employment levels.

• In the US, higher levels of education among Indian entrepreneurs result in a business income advantage of 21 log points, which represents 43.9 percent of the gap.
• High levels of education also contribute substantially to why Indian entrepreneurs earn more in Canada (12.5 log points), but the difference is not as large as in the US.
• “The combination of the larger education advantage held by Indian entrepreneurs and the larger return to education is responsible for the increased importance of education as an explanatory factor in the US compared to Canada.
• “In contrast to these results, the smaller educational advantage and lower returns to education in the UK result in less explanatory power in the UK.”
  

But sectoral and cultural decompositions also matter: “Lower concentrations of Indian entrepreneurs in agriculture and construction, lower female share*, higher marriage rates, and favorable regional distributions also generally contribute to why Indian businesses perform better than white businesses or the national average.”

Again, give it a thought, folks. The above says that Indian entrepreneurs are so spectacularly successful in all three countries because they avoid investing in ‘losing’ sectors and regions. So where does it put state-led efforts to pump money into such ‘losing’ sectors as, for example, agriculture? And where does this leave Ireland’s ‘National Spatial Development Plans’ that reallocate cash to ‘losing’ regions/areas? In the category of ‘luxury goods’ – an affordable (in certain times) cost of keeping at bay social discontent amongst those who are falling behind?

And it also says that higher marriage rates are positively associated with higher returns to entrepreneurship. Who could have thought?


Some food for thought for our immigration policy bureaucrats and our national development authorities, then…



*[Aside - the issue of lower female share of entrepreneurship is, in my view, a simple statistical legacy. Women entrepreneurs tend to run businesses that are on average younger than those for men, hence, some increased risk in statistical measures. Over time, I would expect as female entrepreneurship gains fully similar footing in types of business, sources of financing etc as male entrepreneurship, this difference will disappear completely.]

Economics 22/09/2009: Bleeding jobs...

CSO’s Quarterly National Household Survey (QHNS) Q2 2009 shows ongoing collapse in employment in the country. After peaking at 2.14mln in Q1 2008, employment has now steadily declined and is now down 8.2% - the steepest fall in the history of these series. My prediction – by the year end the fall will total around 8.2-8.5% in annual terms, marking the sharpest decline since 1960s. Current employment stands at 1,938,500 – below the politically important 2 million mark for the second quarter in a row. The pace of employment falloffs is accelerating – in Q1 2009 employment contracted by 7.5% yoy, in Q2 2009 the rate of decline was 8.2%.

Per Ulster Bank note: “To put this in an international context, employment in the US fell by 4.3% from its peak (in Q1 ’08) to the second quarter of this year and that in the UK fell by about 2% on the same basis. So, mirroring the comparative weakness in the broader economy, the Irish labour market is experiencing a much more severe adjustment in employment than is the case among our main trading partners.” Then again, they’ve got a bit more competent political leaderships in the US and UK, that doesn’t raise taxes to pay its cronies wages, don’t they?

Unemployment rate amongst males now stands at 15.1% up from 4.8% in Q2 2007. Female unemployment rate has risen from 4.4% in Q2 2007 to 8.1% in the latest survey. Overall unemployment has gone from 4.7% in Q2 2007 to 5.7% in Q2 2008 and 12% in Q2 2009.



Numbers employed in various sectors are shown in the table below. Public sectors still showing no signs of cost reductions while the rest of economy is bleeding jobs… Public sector employment in Q2 2008-2009 is up ca 16,000. Now, An Bord Snip Nua recommended total numbers reduction of 17,300, which, if delivered would still leave Ireland at ca 2007 levels of public sector employees. Are you laughing yet? For a country borrowing €400mln per week – good half of which goes to pay wages in the public sector – this is really an achievement.
Table above shows another disturbing trend - forced 'entrepreneurship' - notice how more robust are the numbers of self-employed with no employees through the downturn, actually rising between Q2 2007 and Q2 2009. This is a sign of more people being forced to take up self employment in view of lacking full time jobs.

Charts below illustrate some other trends.
Lastly, it is worth noting that QNHS-recorded 2,500 increase in labour force in Q2 2009 is a seasonal aberration as part time employment rises in the summer months. This is going to go into negative territory in Q3-Q4 2009.

We are on track to reach 15-15.5% unemployment sometime in mid 2010. And on track to get close to 10% long-term unemployment by mid 2011. That would be a fitting tribute to the Government that raises taxes in an economy experiencing severe recession...