Will the recent decline in entrepreneurship be reversed by demographic forces?

by on August 7, 2014 at 2:05 am in Data Source, Economics, Uncategorized | Permalink

Annie Lowrey documents that decline, Matt Yglesias offers a partially optimistic hypothesis:

…people are founding fewer new businesses. But why?

One possibility is that the link to population aging is quite literal. A study by Vivek Wadhwa, Raj Aggarwal, Krisztina Holly, and Alex Salkever that looked specifically at “high-growth” industries found that the typical successful founder is 40. Not someone who’s at the tail-end of his career, but not someone who’s fresh out of school either. That’s in part because “professional networks were important to the success of their current business for 73 percent of the entrepreneur,” and it takes time to achieve that success. Mark Zuckerberg founded a great company when he was in college, but that kind of super-young founder is the exception not the rule — most people need some practical experience and contacts to succeed.

And back in the early 1990s, there were a lot of people in their late-thirties and early forties…

Nowadays that cohort of people’s prime founding years are behind them. There is another large cohort of people coming up, but right now they’re too young to be peak entrepreneurs. This cool CNN graphic shows that the most common age in the United States right now is 22 and 23, and that’s followed by 53 and 52.

The story about aging is so well-known that people tend to neglect this sub-trend of the youth bulge. But right now we’re at a moment where a lot of inexperienced workers are entering the labor market, and 10 to 20 years from now we’ll be in a moment when a lot of experienced workers are founding new businesses. But for the past 10 years, we’ve been seeing a demographic trend that’s unfavorable to entrepreneurship.

There are a few relevant questions:

1. At any point in time, are there external benefits or external costs to having more new businesses founded?

2. As organizational capabilities increase with progress, does market equilibrium serve up larger and older firms?  It seems so.

3. What are the external social costs and benefits of that progression?

In poor, developing economies, I think of high levels of petty entrepreneurship as a negative, rather than a positive.  Might the United States be a bit the same way?  Yet the continuation of The Great Stagnation makes that a hard line to buy into enthusiastically.

I thank Robin Hanson for a useful conversation related to this blog post.

1 Steve Sailer August 7, 2014 at 2:12 am

An unprecedented fraction of 22-23 year olds are Latinos. Outside of Cubans, they seem to have high rates of petty entrepreneurship and low rates of grand entrepreneurship.

2 Ray Lopez August 7, 2014 at 2:57 am

I think you are misreading TC, but it’s hard to tell. TC says: “In poor, developing economies, I think of high levels of petty entrepreneurship as a negative, rather than a positive. Might the United States be a bit the same way? Yet the continuation of The Great Stagnation makes that a hard line to buy into enthusiastically.” – I think TC is referring to the fact that many developing countries, including Greece which is kind of Third World IMO, have many “family firms” rather than “big factories” or “Fortune 500” companies as employers. I think (but it’s hard to tell from TC’s cryptic comment) that due to the Great Stagnation more of such ‘non-Fortune 500’ jobs will be created, to the arguable detriment of the USA.

3 Steve Sailer August 7, 2014 at 5:30 am

It’s like Adam Carolla said, the more guys selling oranges on street corners, the cruddier your town is.

4 The Anti-Gnostic August 7, 2014 at 10:03 am

I’m a little conflicted on this. I don’t want to live in a country where fruit vendors struggle to pay for their corrugated tin shacks. But the folks filling all those retail name-tag jobs don’t look too self-actualized either.

5 Peter Schaeffer August 7, 2014 at 12:07 pm

TAG.

As Cowen, Sailer, and even Yglesias all know, high levels of self-employment are strongly correlated with dysfunctional societies that have failed to create enough jobs in the formal economy. Petty entrepreneurship may not be the mark of a bad person (probably not). It is the mark of a bad economy, culture, society, etc. One of the characteristics of such societies is a combination of high taxation of the formal economy and a general lawlessness that allows the informal economy to go untaxed.

Sadly, that is exactly the direction the U.S. is heading. Don’t read Cowen or Yglesias for any useful insights. Read Victor Davis Hanson for the shattering decline of rural California into Mexico (with food stamps, Medicaid, WIC, etc.).

6 Peter Schaeffer August 7, 2014 at 12:01 pm

Steve Sailer, Ray Lopez,

From “Why Hispanics are Natural Democrats and what the GOP can do about it”

Another argument brought forward by George Bush to explain why Republicans could win the Hispanic vote was premised on Hispanic Entrepreneurs voting Republican. In fact he self-employment rate is lower among Hispanics than among Whites. The Bureau of Labor Statistics finds:

“Whites continued to be more likely than Blacks or Hispanics to operate their own businesses”.

More importantly the Hispanic self-employed are mostly small one man operations, such as construction workers, plumbers and landscape architects, not rappidly growing entrepreneurial companies. Mexican immigrants are nearly 30 percent of all immigrants, but only 2 percent of founders of firms in “Innovation/Manufacturing-Related Fields”

7 Mesa August 7, 2014 at 9:38 pm

Poor populations don’t get richer by supplying services to each other. At some point more laundromats and bodegas just make others less profitable. You need exports.

8 Peter Schaeffer August 7, 2014 at 11:49 pm

+1

9 MG August 7, 2014 at 8:59 am

Another potentially inconvenient revelation of further peeling the diversity onion is to plot this demographic wave in terms of (some) college education by gender or in the job market by gender. These two factors, are after all, a lot more meaningful predictiors of new business startups.) I suspect that one would see that the drop in total headcount from boomer to Gen X and Y is more than offset by the increase in employed women/women with college degrees. Would this not also reveal something which demographics best catalyze risk taking?

10 J August 7, 2014 at 11:29 am

An unprecedented amount are also Asian, so you can go worry about something else

11 Peter Schaeffer August 7, 2014 at 1:28 pm

J,

The rising Asian share doesn’t offset the declining white share. California is actually a model of where the U.S. is heading. Real household income is below the 1986 level. Sure California has prosperous Asians. Not nearly enough of them to offset other demographic shifts.

12 Steve Sailer August 7, 2014 at 7:47 pm

California has had a significant Mexican-American population for generations, but Mexican-Americans have very little role in Silicon Valley (nor do they have much of a role anymore in Hollywood, leaving aside Mexico City elites who arrive after finding success in the Mexican media industry, like Cuaron and del Toro). The CEO of AMD a decade ago was Mexican American, but he’s the only one I can think of.

The owners of the Angels baseball team, Arte Moreno, is a genuine Mexican-American self-made billionaire (in the billboard business), but he’s the only one on the Forbes 400.

13 Oakchair August 7, 2014 at 11:55 am

Do you have any evidence for this or are you just being a racist? Given your past posting behavior I’d say racist.

14 Peter Schaeffer August 7, 2014 at 12:08 pm

O,

From “Why Hispanics are Natural Democrats and what the GOP can do about it”

Another argument brought forward by George Bush to explain why Republicans could win the Hispanic vote was premised on Hispanic Entrepreneurs voting Republican. In fact he self-employment rate is lower among Hispanics than among Whites. The Bureau of Labor Statistics finds:

“Whites continued to be more likely than Blacks or Hispanics to operate their own businesses”.

More importantly the Hispanic self-employed are mostly small one man operations, such as construction workers, plumbers and landscape architects, not rappidly growing entrepreneurial companies. Mexican immigrants are nearly 30 percent of all immigrants, but only 2 percent of founders of firms in “Innovation/Manufacturing-Related Fields”

15 joan August 7, 2014 at 3:19 am

The data show that the creation rate of new firms changed very little from 1990 to 2007, it was in the 80s and since 2008 that the rate declined . I wonder if they even looked at the data.

16 dan1111 August 7, 2014 at 3:23 am

About half of the drop shown in the Brookings paper is a short-term phenomenon since about 2006. This is likely to be due to short-term changes in the economic and/or political climate, not demographics.

Also, the data only goes through 2011. A lot could have changed in the short-term picture since then.

17 Ryan Decker August 7, 2014 at 7:46 am

– I have been amazed at how many econ journalists and economist bloggers were not already aware of these trends. The Hathaway and Litan briefs have not revealed new facts; just pushed on them a bit. Academics have known this stuff for some time. The general decline in entrepreneurship was documented in a working paper that started circulating almost 3 years ago (here) and in various Kauffman briefs. Over a year ago I blogged about the aging of the firm distribution. The lesson seems to be that journalists and bloggers only read Brookings briefs.

– The Yglesias argument is just speculation. We’ve had a hard time finding evidence for it. The aggregate times series should make anyone skeptical. If he wants to push this story, he should use regional variation (for a start).

– This isn’t just about subsistence entrepreneurship, the “orange sellers” and mom-n-pop shops. At least starting around 2000, high-growth entrepreneurs took a hit too.

– While it’s true that the datasets on which these findings are based currently end in 2011, the establishment birth data we see in the BED (which extends through 2013q4) are suggestive (though not conclusive, since establishments aren’t firms). Don’t expect a massive rebound in new firm formation on the heels of the Great Recession.

18 Mesa August 7, 2014 at 7:48 am

The study is based on number of employees not output or market cap. Possibly what’s going on is technology based companies are highly leveraged in terms of impact per employee. So the entrepreneurial function requires fewer people to have the same impact.

19 Mesa August 7, 2014 at 7:53 am

And the winner take all nature of networks means fewer companies are required as well.

20 VTProf August 7, 2014 at 9:15 am

Part of the decline has to do with big box retail replacing mom & pop, which is generally productivity-enhancing. But it appears things have changed since 2000: “I think it’s fair to assume that the pre-2000 decline of entrepreneurship may have been largely about the death of the mom-n-pop, but since then even high-growth entrepreneurship has taken a hit”
http://updatedpriors.blogspot.com/2014/08/entrepreneurial-decline-mom-n-pop-or.html

And also: http://noahpinionblog.blogspot.com/2014/05/declining-us-dynamism-story-or-non-story.html

21 Ben Casselman August 7, 2014 at 11:12 am

I find it really hard to attribute much of the decline to demographics given how poorly the trends line up. I showed this in chart form here: http://fivethirtyeight.com/datalab/dont-blame-age-for-declining-u-s-entrepreneurship/. Aging might be a contributing factor in the more recent decline, but the trend began at a time when baby boomers were still entering their prime entrepreneurial years.

22 Mesa August 7, 2014 at 12:26 pm

Another possible effect is that the Census data does not include the self employed.

23 Peter Schaeffer August 7, 2014 at 12:34 pm

All,

“One possibility is that the link to population aging is quite literal. A study by Vivek Wadhwa, Raj Aggarwal, Krisztina Holly, and Alex Salkever that looked specifically at “high-growth” industries found that the typical successful founder is 40.”

Basically true and has been for a long time. It takes a while to become an expert in any field and become recognized as an expert. It takes time to learn who to hire and have a range of contacts and associates that you can use to build a new firm. It takes time to gain access to financing. In some cases, it just takes time to save up enough money to start a firm. Gates and Zucky are exceptions.

A few examples, Henry Ford was 40 when he started Ford Motor Company. Ellison was 33 when he started SDL (what became Oracle). Gene Amdahl founded Amdahl when he was 48. The founders of Intel were all around 40. Conversely, all of the founders of Sun Microsystems were under 30 when they started the firm.

24 dirk August 7, 2014 at 1:24 pm

Maybe it’s much riskier now to be an entrepreneur, because if you fail, you face the new ZMP stigma and will have a hard time getting rehired by someone else.

25 Peter Schaeffer August 7, 2014 at 1:30 pm

dirk,

No. People talented enough to create a startup are still unusual. They are on the “right” side of “the end of average”.

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27 Ryan Decker August 7, 2014 at 7:08 pm

– I have been amazed at how many econ journalists and economist bloggers were not already aware of these trends. The Hathaway and Litan briefs have not revealed new facts; just pushed on them a bit (in helpful ways). Academics have known these facts for some time. The general decline in entrepreneurship was documented in a working paper that started circulating almost 3 years ago (here) and in various Kauffman briefs. Over a year ago I blogged about the aging of the firm distribution.

– The Yglesias argument is just speculation. We’ve had a hard time finding evidence for it. The aggregate times series should make anyone skeptical. If he wants to push this story, he should use regional variation (for a start).

– This isn’t just about subsistence entrepreneurship, the “orange sellers” and mom-n-pop shops. At least starting around 2000, high-growth entrepreneurs took a hit too.

– While it’s true that the datasets on which these findings are based currently end in 2011, the establishment birth data we see in the BED (which extends through 2013q4) are suggestive (though not conclusive, since establishments aren’t firms). Don’t expect a massive rebound in new firm formation on the heels of the Great Recession.

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