Abstract

In employment catchment areas with younger populations, companies are more innovative. To arrive at this result, we calculate the “theoretical” average age of the local working population using its historical birth rate. This allowed us to show that the age of the population is the factor that contributes to innovation, and not the reverse, e.g. the result of importing skilled labor from other regions. What’s more, the patents filed in these areas with many young people also stand out for their greater degree of creativity and risk-taking. The results are not only related to the age of the inventors, but to the age of the local labor market as a whole. A given inventor, placed in a younger employment pool, will innovate more than an identical inventor working amid an older population and not benefiting from interaction with younger workers. HEC Paris Research Paper No. FIN-2017-1243, 2018. 

3 questions François Derrien, Professor of Finance at HEC. 

What are the main conclusions of your article?

François Derrien Professor of finance at HEC, his research focuses on corporate finance. He is studying how the business environment influences companies’ investment decisions, results, and value. Recently, he has focused on the link between demographics and the ability of companies to innovate and grow.

We wanted to know how youth and innovation were linked. The first hypothesis is that the highly innovative companies in Silicon Valley, for example, are innovative because they attract young creative workers. 

The second hypothesis is that the youth of the working population induces innovation in the region. In that case, the ecosystem would be more important than the presence of a few individuals with a capacity for invention. To set these two hypotheses apart, we constructed a projection of the labor force as it would appear at a time T, in the absence of any migration. We concluded that certain regions do indeed have an intrinsic capacity to innovate that depends on demographic factors. And that capacity correlates to the average age of the local population. Those companies that benefit from a young workforce produce more and better patents. In addition, we have observed that inventors are more innovative when they work in a region where the workforce is younger.  

But haven’t other studies shown that productivity peaks around the age of 40? 

That is not inconsistent with our results. Those studies include selection biases. They look at people who have already achieved success, whereas a person can innovate at 20 years of age, but fail to make an impact. Admittedly, at 40 years of age, we have more resources and experience. Nevertheless, from the point of view of innovation, it is better to surround yourself with people aged 20 than 60. 

What are the consequences of this for companies and countries? 

Our study only looked at the United States, and it is difficult to generalize. But it is fair to say that innovation is threatened by aging, which is not good news for France. Our companies may have to leave the country to find an energized workforce elsewhere, e.g. in Asia. But for the time being, the opposite is happening. Companies have a tendency to relocate when they can receive tax incentives from aging or stricken regions. This was one of the reasons Boeing moved from Seattle to Chicago in 2001.