Divergent Fortunes: How Can We Explain Growing Older

Divergent Fortunes: How Can We Explain Growing Older

Divergent Fortunes: How Can We Explain Growing Older Entrepreneurship and Declining Younger Entrepreneurship? Christian Weller, University of Massachusetts Boston and Center for American Progress Jeffrey Wenger, RAND Professor Christian Weller and Jeffrey Wenger acknowledge support for this work from The Ewing Marion Kauffman Foundation, grant #20150527. Overview Entrepreneurship has grown for older households, but fallen for younger ones since the late 1980s. We find that differences in private (and public) income diversification can explain much of the gap. We focus on an understudied explanation: the role of cash income diversification in determining entrepreneurship. The results suggest that the gap in having substantial income from capital income and from annuities has widened by age over time, while entrepreneurship at all ages has become more response to income diversification. Key other factors do not sufficiently explain the widening entrepreneurship gap by age: 1) economic pressures younger households delayed rather than accelerated entrepreneurship; 2) liquidity constraints ease for both younger and older households; 3) there is no widening gap in nonpecuniary rewards by age. Policymakers interested in raising entrepreneurship should consider making more opportunities for cash income diversification available to younger households. Authors calculations based on Board of Governors. Federal Reserve System. Various years. Survey of Consumer Finances. Washington, DC: BOG.

Possible explanations for the divergence Primary: Income diversification: Entrepreneurs rely on income diversification from capital income and annuity income. Older entrepreneurs have had more income diversification than younger entrepreneurs over time. Alternative 1: Economic pressures: Labor market pressures contribute to rising entrepreneurship by pushing people away from wage and salary employment. Older workers could have faced more labor market pressures than was the case for younger ones. Alternative 2: Liquidity constraints: Liquidity constraints have eased for all households. The decline in liquidity constraints is more pronounced among older households due to greater collateral. Alternative 3: Non pecuniary rewards: People pursue entrepreneurship due to non-pecuniary rewards such as autonomy and avoidance of discrimination. Nonpecuniary rewards are greater for older households due to age discrimination, which may have gotten worse, for instance, due to a faster rise in long-term unemployment among older households. Income diversification more prevalent among older households Younger than 50 years 50 years and older Early years Late years Early years (1989 Late years (2001 (1989 to 1998) (2001 to 2013) to 1998) to 2013) Share of households with substantial capita income (capital gains and interest and dividend income)

17.8% 14.7% 34.5% 28.3% Share of households with substantial Social Security, retirement and other annuity inc. 2.5% 2.9% 28.6% 35.9% Share of households with substantial income from either source 19.8% 17.4% 52.0% 52.9%

Income diversification increasingly matters for entrepreneurship (RRR based on multinomial IV logit DV is likelihood of entrepreneurship relative to wage and salary employment) Early period, 1989 to 1998 Later years, 2001 to 2013 Post Great Recession Early period, 1989 to 1998 Later years, 2001 to 2013 Post Great Recession Age Has substantial government transfer income 1.1115** 0.8380 1.0216**

0.5918** 0.9966 0.5331** 1.0180 0.3664* 1.0052 0.8856 1.0072 0.8219 Has been delinquent on any past bills 2.2114** 1.5170+ 2.1660** 4.2150** 3.6400** 3.5690** Has substantial capital income

1.6688** 1.7394** 1.7270** 1.7884** 1.8963** 1.8820** 0.6560 1.1219 1.8264 0.8434 1.2051 1.6548** Has sub. Soc. Sec., pension and annuity inc. Economic pressure may delay younger entrepreneurship, especially when considered in combination with regression results

Households younger than 50 years Early years (1989 to 1998) Late years (2001 to 2013) Households 50 years and older Early years (1989 to 1998) Late years (2001 to 2013) Share of entrepreneurs with substantial government transfer income (UI and workers' compensation) 5.3% 5.9% 4.6% 6.3% Share of part-time entrepreneurs 35.2% 33.6% 35.9% 31.3%

38.5 39.4 60.1 60.3 Average age of entrepreneurs Liquidity constraints ease for all entrepreneurs, confirmed also by regression results Households younger than 50 years Households 50 years and older Early years (1989 Late years (2001 Early years (1989 to 1998) to 2013) to 1998) Late years (2001 to 2013) Delinquency rates for entrepreneurs 5.2%

5.3% 3.2% 3.5% Denial rates for entrepreneurs Debt to asset ratio for entrepreneurs (median) 14.5% 19.7% 13.6% 25.2% 8.9% 4.4% 7.7% 9.0% Debt to asset ratio for wage and salary employees (median) 47.2% 55.8% 13.2% 19.8%

Ratio of entrepreneurs to wage and salary employees 41.7% 45.1% 33.2% 45.5% There is no trend in nonpecuniary benefit differences by age Discussion The widening gap in entrepreneurship by age follows a widening gap in income diversification older households have more of it than younger ones: Follows from disproportionate wealth gains for older households. Follows in part from strong labor market gains in the late 1990s that subsequently boosted Social Security benefits for older households. Economic pressures appear to lead younger households to delay entrepreneurship, but appear to have no effect on older entrepreneurship. Liquidity constraints ease for all households without a clear patter by age. We do not observe differences in nonpecuniary benefits of entrepreneurship by age. Policymakers can mimic income diversification by increasing key benefits and raising flexibility of use of benefits.

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