The Agenda

Edward Glaeser on Employment Growth in the Post-Retirement Era

Edward Glaeser on elderly workers and the lump of labor fallacy:

IT’S counterintuitive, but the forever work life of older Americans may turn out to be a good thing for young workers. The “lump of labor fallacy” envisions an economic order in which there is a fixed amount of work to be done. But we can make more or less, buy more or less, and most important, we can create new lines of enterprise. Over time, growth and innovation can create plentiful new work opportunities. If the economy needed only a lump of labor, the spectacular expansion of America’s female work force would have led to vast male unemployment. But it didn’t. In fact, the number of working women rose by 87 percent in the 25 years between 1975 and 2000, during which time total male employment also increased, by 41 percent.

Recent studies in Britain and Germany find a positive correlation between labor-force participation among the elderly and youth employment. It’s not that older workers never crowd out younger workers, but there are myriad ways in which older workers also increase employment among the young. As older workers earn more, they can afford to buy more products produced by the young. Older workers may be entrepreneurs who employ younger workers, and they may pass along valuable skills to the young.

Given that the popular post-1980s image of entrepreneurship is dominated by the young, Glaeser offers a useful corrective.

America desperately needs more entrepreneurship, and by at least one measure, the elderly are often the most entrepreneurial Americans. Self-employment rises significantly with age. West Palm Beach, a retiree haven, has the highest self-employment rate of any metropolitan area in the nation; other areas around the country that attract older Americans boast similar self-employment patterns. Self-employment is particularly natural for older Americans, because it provides so much more control over working hours and conditions. While self-employment is surely an imperfect measure of entrepreneurship, it correlates with other indices of entrepreneurship. I’m not suggesting that West Palm Beach is likely to become the next Silicon Valley, but we shouldn’t pooh-pooh the independent economic activity of the elderly, either.

Of course, self-employment and entrepreneurship aren’t the same thing. Daniel Isenberg recently offered a brief description of the differences between them:

This distinction is an important one for policy makers, who believe, implicitly or otherwise, that some unspecified percentage of self-employed will naturally transform themselves into entrepreneurs. This is a complex issue, but the best research suggests that this transformation is very rare, a conclusion that is supported by realizing the inherent differences between the two: If my grandfather thinks that self-employment is a fate to be avoided, why would he suddenly develop entrepreneurial aspirations?

To oversimplify a bit, high aspiration entrepreneurs need customers, risk capital, less red-tape, government non-interference, and global access. They thrive in uncertainty and chaos. The self-employed and small business owners require bank credit and micro-loans, skills training, stricter regulation in many cases, and heavier overall government support. They require predictability and stability.

Tino Sanandaji, with whom I’ve collaborated, has also discussed the distinction between entrepreneurship and self-employment. I particularly like his explanation because it illustrates the ways in which high levels of self-employment can actually be a warning sign:

Entrepreneurship is, according to the dominant Schumpeterian delineation, defined by innovation and growth by individuals who create new organizations. Entrepreneurship is an economic function, and an important one.

Self-employment on the other hand is simply an contractual form, you work for yourself.

Most self-employment is non-entrepreneurial.

You get lots of self-employment when transaction costs are too high and the institutional quality low, such as in Greece. However, you have to be pretty ideologically blind to claim that Greece has many entrepreneurial firms.

Only a small number of firms are “gazelles” that actually fuel employment growth. So on this score, at least, I think Glaeser is being too optimistic. Longer working lives benefit public finances by easing dependency ratios and by strengthening social attachment among the elderly. The inevitable rejoinder to claims of this kind is that many Americans work jobs that are demoralizing and physically exhausting, which is undoubtedly true. But the quality of work has improved since the middle of the last century, and there is good reason to believe that it will continue to do so. Indeed, Glaeser notes that elderly Americans are concentrated in the education and health care sectors.

I suspect that self-employment levels will increase as the transaction costs involved in hiring workers increase. We’ve seen more firms relying on independent contractors as the cost of hiring full-time employees, and the cost of dismissing employees, rises. That is, unless we see a wave of what Walter Russell Mead has referred to as “post-blue” structural reform, there will be a tendency to converge on a Mediterranean model in which rent extraction by the public sector outpaces entrepreneurial growth.  

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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