There’s another way Australia’s ageing population will ruin our economy that nobody is thinking about

Out of the US National Bureau of Economic research comes a brand new paper by researchers from Stanford University and Beijing University. It’s a triumph of scholarship and it is full of bad news.

The researchers look into entrepreneurship to see the demographic impact. It turns out to be bad news for those countries whose workforce is ageing.

The reason the researchers hypothesise is that younger people don’t get the experience they need to make a business fly. Their inherent capacity to think about problems in a new way is not matched with business skills. The reason for that is that old people are hogging all the senior positions.

“Workers may begin with raw talent and inherent creativity, but the acquisition of skills at work is essential to their founding a business. It is for that reason that the young are not the ones most likely to start businesses, even if they are the most creative. They must have time to obtain the skills on the job that will allow business that they found to succeed.”

Stuck at the bottom of the corporate ladder, it's raining, and the economy is being ruined. This is your life.
Stuck at the bottom of the corporate ladder, it’s raining, and the economy is being ruined. This is your life.

The data support this model of thinking about entrepreneurship:

“The estimates imply that a median age that is one standard deviation lower is associated with a 2.5 percentage point higher country rate of entrepreneurship, which is about 40% of the mean rate. This effect is significant both statistically and economically, and is robust across different specifications, alternative measures of entrepreneurship, and among OECD and non-OECD countries.”

But older people have more business skills and experience. Does that help? Not at all, apparently.

“Within every age group, the entrepreneurship rate is lower in countries that are older.”

Japan is the sine qua non of this theory, with its fertility rate declining towards 1.0 and massive conglomerate companies full of ageing workers.

“[I]n Japan, none of the top 10 high-tech companies were founded in the last 40 years. New firm entry
rate dropped from the 6 to 7% range in the 1960s and 1970s to 3% in the 1990s (Acht, Thunik, and Verheut, 2004), which amounts to less than 1/3 of that in the U.S. and trails all the other OECD countries. “

Potato Drink? Japan, you've stopped even trying.
Potato Drink? Japan, you’ve stopped even trying.

The researchers emphasise the importance of entrepreneurship to economic vitality. New companies tend to do things old ones just can’t.

“Existing companies can modernize and update their products and techniques of production, but the major innovations tend to be associated with entrepreneurship and the formation of new companies.
Many significant inventions of the last 150 years illustrate the point. Thomas Edison invented the light bulb and founded General Electric. The inventor of the automobile was Karl Friedrich Benz, followed closely by Gottlieb Wilhelm Daimler. Daimler-Benz is the product of their inventions. Alexander Graham Bell invented the telephone and founded AT&T. Guglielmo Marconi, the inventor of radio, was a founder of Wireless Telegraph & Signal in Britain. The Wright Brothers founded The Wright Company, which later became Curtiss-Wright. Steven Wosniak, who invented the personal computer, teamed up with Steve Jobs to form Apple. The list goes on.

In Australia, you might cite Kogan and Cochlear, A2 milk and Atlassian.

But to produce a handful of companies that are both new and extremely exciting, you need a steady stream of companies that are new.

And Australia has been performing worse and worse on that measure.

Decline of business entries

 

There could be many reasons this has happened. But the data doesn’t refute the theory that demographics should take the blame.

decline of under 40

Everyone already knows the ageing of Australia’s population will create a major labour force shortfall. We’ve all heard that there will be fewer and fewer workers in the economy for every retiree (This article says the ratio will decline from 15:1 in 1909 to 2.6:1 by 2050). Everyone is aware of the fiscal imperatives around ageing. But the possibility that it is crushing the spirit of our economy is not something I’ve heard discussed.

But there is one shining light in the darkness. Not all the variation in entrepeneurship can be explained by ageing. In fact, the most entrepreneurial state in Australia is also one of its oldest: Victoria. The high rates of international migration, high levels of education and the density of the population may all be part of the reason.

If policy-makers want to keep Australia’s economy sharp and firing even as it greys, they should keep a close eye on the state south of the Murray.

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

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