Stemming the demographic tide on entrepreneurship in the U.K.
Entrepreneurship is widely acknowledged as the basis for innovation, technological advancement and economic progress—and subsequently, a driving force for improved living standards. Yet there’s little discussion, let alone action, in the United Kingdom to stem the adverse effects of demographic change on entrepreneurship, specifically the aging of our population.
Most people are aware that our population is aging. However, it’s not generally understood that as our population ages, the share of the population best positioned to be successful entrepreneurs—individuals in their late-20s through to their early-40s—will shrink. People in this age group drive entrepreneurship because they are willing to take risks to start their own business while also possessing real-world business experience, which increases the likelihood of success.
Consider that the percentage of the U.K population between the ages of 30 and 39 declined from roughly 14 per cent in the 1980s to roughly 13 per cent today, and is expected to decline to around 12 per cent by the 2040s. Correspondingly, the rate of small business startups, a key measure of entrepreneurship, declined by 7.5 per cent when comparing the six years (2001-2007) before the Great Recession to the following six years (2008-2014), the most recent data available.
And this is not a uniquely British experience. Almost all industrialized countries have seen declines in small business startups. For example, the United States experienced an 18.6 per cent decline over the same period outlined above, while Australia (20.3 per cent) and Canada (8.5 cent) also incurred declines.
No doubt there are a host of country-specific explanations for the varying rates of decline in entrepreneurship. However, the fact that all industrialized countries are experiencing population aging—at the same time entrepreneurship is declining—underscores the potential adverse effects of demographic changes on entrepreneurship.
While there’s little governments can do to stem populations aging, a number of policy levers are available to strengthen incentives for entrepreneurship and improve the likelihood of successful new business startups. A recent set of essays by leading international scholars explored possible policy reforms to promote and improve entrepreneurship including tax relief, both in the form of reductions in marginal tax rates for individuals and businesses and reductions (or even the elimination) of capital gains taxes. These reforms were broadly determined to strengthen the incentives for people to start and grow businesses (i.e. take risks) and expand the pool of entrepreneurial capital.
Other key potential reforms include reducing red tape to make it easier to start new businesses and grow existing ones, changes to banking and financial regulations that would make it easier for entrepreneurs to access the financial capital needed to start and grow their businesses, and policies encouraging increased immigration of individuals with skills and other attributes that make them potential entrepreneurs. Moreover, improving educational programs that help build entrepreneurial skills, and strengthening networks connecting universities to businesses and researchers in other institutions, could also increase the supply of entrepreneurial talent.
Finally, in one of the set’s more provocative essays, noted economists Deirdre McCloskey and Art Carden explored the positive effects of a culture that values and promotes enterprise and entrepreneurship, as opposed to disparaging such activities. The importance of their essay cannot be overstated given the recent anti-business rhetoric in many industrialized countries.
Of course, the various policy initiatives to encourage entrepreneurship put forth by scholars in the essay series will apply to different countries in varying degrees. It’s clear, however, that developed countries, including Britain, face a long-term decline in entrepreneurship that is at least partially driven by demographics. Since demographic trends cannot be easily reversed, countries must improve the environment in which entrepreneurs and businesses operate, to encourage more and better entrepreneurs and the subsequent benefits to the economy.
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