The Young, the Restless and Economic Growth

Countries with a younger population have far higher rates of entrepreneurship.

Despite the strong showing in third quarter, GDP growth since the official end of the recession in June 2009 has been substandard. Some worry that the U.S. may follow in Japan’s footsteps, experiencing a “lost decade” of economic stagnation. It may sound strange, but here’s one way to avoid Japan’s fate: import young people.

Like many developed countries, Japan has a rapidly aging population. Countries with older populations have lower rates of entrepreneurship. Economic stagnation can be a consequence of slow innovation and lethargic business formation. To avoid becoming Japan, the U.S. needs a younger population. More and improved immigration is one way to achieve that goal.

In a current study analyzing the most recent Global Entrepreneurship Monitor (GEM) survey, my colleagues James Liang, Jackie Wang and I found that there is a strong correlation between youth and entrepreneurship. The GEM survey is an annual assessment of the “entrepreneurial activity, aspirations and attitudes” of thousands of individuals across 65 countries.

In our study of GEM data, which will be issued early next year, we found that young societies tend to generate more new businesses than older societies. Young people are more energetic and have many innovative ideas. But starting a successful business requires more than ideas. Business acumen is essential to the entrepreneur. Previous positions of responsibility in companies provide the skills needed to successfully start businesses, and young workers often do not hold those positions in aging societies, where managerial slots are clogged with older workers.

In earlier work (published in the Journal of Labor Economics, 2005), I found that Stanford MBAs who became entrepreneurs typically worked for others for five to 10 years before starting their own businesses. The GEM data reveal that in the U.S. the entrepreneurship rate peaks for individuals in their late 20s and stays high throughout the 30s. Those in their early 20s have new business ownership rates that are only two-thirds of peak rates. Those in their 50s start businesses at about half the rate of 30-year-olds.

Silicon Valley provides a case in point. Especially during the dot-com era, the Valley was filled with young people who had senior positions in startups. Some of the firms succeeded, but even those that failed provided their managers with valuable business lessons.

My co-author on the GEM study, James Liang, is an example. After spending his early years as a manager at the young and rapidly growing Oracle, ORCL -0.63% he moved back to China to start Ctrip, one of the country’s largest Internet travel sites.

The importance of youth is illustrated by the stark contrast between two neighboring countries, Japan and Korea. Using the GEM survey data, we found that Japan’s rate of entrepreneurship (the proportion of individuals who own a business that they founded in the past 42 months) is just 1.5%. In Korea the rate is a much higher, 8%. The median age in Japan is 43; in Korea it is 34. The U.S., with an entrepreneurship rate of 4.4% and a median age of 36, is in the middle of the pack on both entrepreneurship rates and median age.

More surprisingly, our analysis of the GEM survey finds that a country with a population that is just three years younger—Brazil as compared with Argentina, for instance—has about 21% more entrepreneurship. For Organization for Economic Cooperation and Development countries, cutting the median age by two years (like the difference between the younger U.S. and older U.K.) implies about a 10% increase in new business formation.

One way to change the age structure of a country is to increase immigration. Immigrants tend to be younger than the general population. According to the Department of Homeland Security, the median age of green-card holders is five years younger than that of the U.S. population. Those who come in on H-1B skilled-foreign-worker visas are younger still. In 2012, 77% of H-1B workers were under the age of 35.

Favoring immigration of those who are likely to be more entrepreneurial—say, by raising the annual visa quota for H-1B workers, as the immigration bill passed by the Senate would do—would be an added plus. But even without selecting high-potential entrepreneurs, younger populations are more prone to create businesses by putting young workers in positions where they acquire the skills to innovate.

If Japan, a rapidly aging country with famously prohibitive immigration laws, teaches us anything, it is this: If you want to avoid a “lost decade,” open your doors to immigrants.

Mr. Lazear, chairman of the president’s Council of Economic Advisers from 2006-09, is a Hoover Institution fellow and a professor at Stanford University’s Graduate School of Business.

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