As part of the blog series summarizing the Fraser Institute’s Demographics and Entrepreneurship essays, this post examines how changing demographics adversely affect entrepreneurship.

Entrepreneurship is key for the creation of new goods and services that constantly improve our standard of living. From household basics such as washer/dryers, to medical procedures such as heart transplants, and technology such as computers, the Internet and cellphones, virtually every aspect of our lives has been touched by the creativity of entrepreneurs that each day search for new profit opportunities.

Unfortunately, long-run demographic trends in the developed world are starting to slow this entrepreneurial progress, and it’s critical that governments start to take steps to offset these factors with improved policy.

In countries such as the United States, Canada, Australia and the United Kingdom, the median age has risen by an average of 9.5 years over the past 50 years, and is projected to rise by an average of 5.3 more years across these countries over the next 50 years. Simply put, our populations are aging.

More importantly, in these countries the percentage of the population aged 25 to 49 will fall by an average of 4 percentage points over the next five decades. The reasons behind the demographic trends in aging are complex, but involve several factors including reduced fertility rates in wealthier countries, improved medicine and life expectancy, and the postwar baby-boom generation moving through the populations of these countries.

There are four aspects to the entrepreneurial process that are adversely affected by this demographic trend: (1) the number of entrepreneurial opportunities, (2) the presence of individuals who are creative and can discover new solutions, (3) the presence of individuals willing to risk being an entrepreneur, and (4) the presence of individuals with the skills and experience to successfully open and run a business.

First, aging populations will cause shifts in consumption patterns away from activities that are easier to enter for first-time entrepreneurs (such as restaurants and the travel industry’s sharing economy) and into areas mostly dominated by larger, long-lived businesses and government-run (or regulated) enterprises such as hospitals. Simply put, older consumers spend a significantly smaller share of their budget eating out and travelling, and significantly more on health care.

Second, entrepreneurship requires creativity, and research shows that this creativity is maximized in early adulthood and declines afterward. Thus as populations age, the number of creative-class individuals declines in the population.

Third, the willingness to take on risk also falls with age, so increasing risk-aversion will reduce the proportion of the population interested in entrepreneurship relative to more stable sources of wage income.

Lastly, aging populations will suffer reduced business skills and experience, not just because of the pattern of education and human capital accumulation over one’s lifecycle, but also because older workforces reduce the opportunity for younger workers to gain skills and capabilities through occupational advancement.

Fortunately, demographics are not the only factor that affects entrepreneurship rates. The rules and laws in each country or sub-national area can also have large impacts on rates of entrepreneurship. By pursuing policies that can help increase entrepreneurship rates, it may be possible to offset the coming declines caused by aging populations in developed countries.

There’s a clear and robust link between the quality of a country’s economic policies, its economic performance and rate of entrepreneurship. Simply stated, policies consistent with more economic freedom result in higher levels of prosperity and entrepreneurial activity. Most importantly, these policies include institutions providing secure property rights, a non-corrupt and independent judicial system, contract enforcement, and effective limits on government’s ability to transfer wealth through taxation and regulation.

As the effects of an aging population on entrepreneurship mount, governments will face increasing pressure to act. By strengthening incentives for entrepreneurship and improving the environments for entrepreneurs to operate, governments can—at least partially—mitigate the adverse demographic effects.

For more on demographics and entrepreneurship, see here.