Entrepreneurship and Demographics

Abstract

Motivated by Japan’s recent poor economic performance and lack of young entrepreneurs, I build a model of how an aging workforce can negatively affect entrepreneurship activities. The model assumes: 1) young people are more likely to start a company (to be a risk taker); 2) to be successful, a young entrepreneur needs to have high human capital; 3) a young person’s human capital growth depends on his or her position or ranking in the organization. With these assumptions, in a typical seniority based system, young people will be promoted more slowly when the size of the old cohort is relatively larger in the organization. Therefore, in an aging society, not only there are fewer young people, but even fewer young people with the high human capital necessary for being successful entrepreneurs. Empirically, I find that young cohort size is positively linked to entrepreneurship activity and economic performance.