Organisation of households: Household and business formation

Organisation of households: Household and business formation

Phuah Eng Chye (24 March 2018)

Demographic aging and shrinking households can be regarded as marking the transition to a less physical environment; namely an information society. Physical environments require resources and manpower for war and physical production and growth is sustained by expanding populations. In contrast, an information society faces demand satiation and requires less physical resource and labour. It is therefore not surprising that aging and shrinking household sizes coincides with the hollowing out of manufacturing and with a slowdown in business formation.

Keiko Ujikane notes “a lot of businesses in Japan are shutting down simply because their owners have no successor to pass the reins to when they retire. The number of companies that were closed last year reached almost 24,000, which is about triple the number that went bankrupt, according to corporate researcher Teikoku Databank. The likely reason: many small business owners who were born in the years after WWII are retiring and their heirs or offspring would rather do something else.” He observed 77% of companies that went out of business had no heirs and 66% of those still in business had no heirs.

The family-based business model where family members pass on skills and relationships through generations is fading. As households become more modular and diverse, small business entrepreneurs increasingly need to rely on non-family employees to stay in a lengthy apprenticeship. But turnover is high as lowly-paid apprentices will tend to leave for better opportunities. This will undermine the enthusiasm of entrepreneurs who will tire of re-training fresh batches of employees. The traditional family-owned businesses are thus being replaced by virtual and transient businesses that do not require much employees and physical assets.

Aging also reflects a dulling of the vibrancy of the entrepreneurial process. Maurizio Bussolo, Johannes Koettl and Emily Sinnott note “there is empirical evidence that older people are less mobile, less innovative, and less entrepreneurial. Experience is often job specific and becomes less valuable if workers have to change firms or deal with new technologies. Older workers are less mobile because they have established a family, own a house, or accumulated job-specific benefits. Older people become less entrepreneurial, because risk taking becomes more costly as they have more to lose. Especially when economic growth requires substantial change, an aging society can become a disadvantage.”

Overall, aging and changing household organisation have a dampening effect on the traditional business formation process comprising family-owned SMEs. Government policies to revive small business will therefore be ineffective if they take into account the changes in household and business organisation.

References

Keiko Ujikane (15 September 2016) “Pensioners pumping iron shows how much aging is reshaping Japan. The social and economic landscape is changing in unusual ways”. Bloomberg. http://www.bloomberg.com/news/articles/2016-09-14/pensioners-pumping-iron-shows-how-much-aging-is-reshaping-japan

Maurizio Bussolo, Johannes Koettl, Emily Sinnott (2015) “Golden aging: Prospects for healthy, active, and prosperous aging in Europe and Central Asia”. World Bank. https://openknowledge.worldbank.org/handle/10986/22018

Phuah Eng Chye (10 March 2018) “Organisation of households: Changing household structures and dependency”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/organisation-of-households-changing-household-structures-and-dependency/

Phuah Eng Chye (17 March 2018) “Organisation of households: Shrinking households, labour market frictions and societal cultures”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/organisation-of-households-shrinking-households-labour-market-frictions-and-societal-cultures/

Phuah Eng Chye, demographics, aging, household size, household formation, business formation, Keiko Ujikane, World Bank

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