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Are Aging Economies Less Innovative?
Reduced innovation may be a serious cost of global aging. This is in addition to the other economic burdens of demographic aging—like rising dependency costs, lower savings rates, less capital broadening, and shrinking market size.
NewsWire readers are familiar with most of the problems that global aging poses to economic growth. In aging societies, governments spend more on pay-as-you-go senior benefits, economies of scale unravel, and both firms and workers are tempted to cartelize shrinking markets.
On the public cost side, just consider this: In the U.S., from 2021 to 2060, the ratio of seniors to workers is projected to rise from 24.8% to 42.0%. Payroll taxes can be expected to rise proportionally. And that’s significantly less than the increase that is expected to occur in most of Europe and East Asia.
But that’s not all. Another challenge to future productivity growth (and therefore to per-worker income growth) is the tendency of aging economies to innovate less. This “innovation gap” will matter more than ever in an era of rapid technological change and may turn out to be the biggest drag on living standards of all.
Economies with growing shares of workers who are 50+ tend to undergo a qualitative shift in their skills and abilities. They see more productivity growth based on experience and accumulated knowledge, or “crystallized intelligence.” But they see less productivity growth based on innovation that relies on totally new approaches to solving problems, or “fluid intelligence.” Though there are different forms of fluid intelligence, studies suggest that most of them tend to peak in early adulthood and begin declining in one’s late 30s.
Aging economies have been trying to retain older workers by raising the retirement age. But workers in their 50s and 60s generally do not bring the same strengths or talents as workers in their 20s, 30s, and 40s. Both are important, but it’s the latter group that drives radical innovation.
In a 2021 NBER study that examines the relationship between patents and age, researchers find that it’s the very youngest inventors who are most likely to be filing groundbreaking patents. Although patenting rates typically do not peak until a researcher’s late 30s or early 40s, the patents become increasingly incremental as researchers age. The study measures how disruptive patents are by counting how often they are cited by subsequent inventors while prior technologies are not cited. A truly innovative invention, in other words, becomes the foundation for future work and makes its predecessors less relevant.
The correlation between youth and innovation is not limited to a particular type of profession. As I noted in my book The Graying of the Great Powers, other research finds that scientists and economists put out fewer publications as they age, and the quality of the journals in which they are published declines. The creative output of musicians, painters, and writers peaks in the 30s and 40s. The age distribution of Nobel Prize winning scientists follows an even steeper trajectory than that of creative cultural output: rising sharply in the 20s, peaking in the 30s, and declining sharply in the 40s.
Why does a demographically driven decline in innovation matter? Because innovation raises total factor productivity. It’s only through new inventions and improvements to existing technologies that societies are able to produce more from the same amount of labor and capital.
Some economists believe that we are already seeing the effects of this decline in some parts of the world. It may be one of the drivers behind the long-term decrease in business dynamism observed in the United States. (See “Declining Business Dynamism: A Visual Guide.”)
In 2014, another NBER paper reported that entrepreneurship rates are consistently lower in older countries. A one-standard deviation increase in the median age in a country (about 3.5 years when this study was conducted) results in a 2.5 percentage-point decrease in the entrepreneurship rate. In 2010, the mean entrepreneurship rate globally was 6.1%, so a shift up or down of this magnitude makes a big difference.
What’s more, the entrepreneurship rates in older countries are lower at every age. Young workers in a country with a younger workforce, such as the United States, are more likely to be entrepreneurial than their peers in a country with an older workforce, such as Japan. The paper argues that Japan’s advanced age structure helps explain the “entrepreneurship vacuum” that the country has experienced since the 1990s. Japan’s entrepreneurship rate is now lowest among all OECD countries.
Aging societies, in other words, are not characterized simply by a shortage of young people. They foster a more risk-averse environment in general. As the workforce grays, business management becomes more conservative. A higher median employee age means that it takes longer for younger workers to advance through the ranks. Fewer people start businesses. Consumption goes up, and the savings rate goes down.
Once innovation declines, the trend tends to be self-reinforcing. A 2022 paper from Boston University economist Nils Lehr found that U.S. cities experiencing faster aging have invested less in R&D employment and are associated with less patenting per capita. He argues that since older workers tend to adopt new technologies at lower rates than younger workers, an aging workforce leads to less demand for cutting-edge technologies and thus fewer incentives to innovate.
To get around potential confounding factors such as reverse causation (e.g., the possibility that less innovative cities simply attract fewer young people), Lehr compared each city’s current level of innovation with that city’s birthrate twenty to forty years earlier. The same relationship holds. Cities that don’t produce as many new people don’t generate, later on, as much innovation.
Demography, of course, is not the only or even the main determinant of a country’s productivity. Other factors, perhaps most notably education, also play a huge role. A young but mostly uneducated populace isn’t going to have a particularly dynamic economy. But demography provides the “raw material” that aging countries must figure out how to harness fully in order to continue growing. Without a steady inflow of educated youth (or advances in technology that can replace those youth), economic growth will slow across the board.
The most straightforward way to boost the educated youth population in a low-fertility, high-income society is through immigration policies that select in favor of young and educated newcomers from the less-developed world. Some countries’ policies are better targeted toward this goal than others’. (For example, Canada does a better job at this sort of targeting than the United States.)
The drawback to this approach? There just aren’t that many well-educated youth in high-fertility, low-income countries to go around. Most often, educated immigrants to attractive high-income countries tend to come from slightly lower-income countries (e.g., credentialed Poles migrating to France, or credentialed French migrating to the United States).
More seriously, the approach threatens to exacerbate the decades-long brain drain from those countries that really do have low incomes and high fertility rates. Sub-Saharan Africa is one of the world’s poorest regions—and also has one of the world’s highest birthrates. Young and educated Nigerians, Ethiopians, Kenyans, etc. have long left for other countries looking for better opportunities. If the Western world were to hoover up all their college grads and entrepreneurs, wealthy countries might succeed in helping themselves, but they would also end up dooming any chance these countries might have to raise living standards at home by the mid-21st century.