Starting a Business Can Increase Older Workers’ Quality of Life (Even When It Doesn’t Pay Well)

HBR.org 2017-09-19

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Photo by Roman Kraft

As a result of declining birth rates and increasing life expectancy, the average age of the global population is increasing. This demographic trend has important implications for the labor market. Aging individuals are not always able to find satisfactory outlets for their abilities. Moreover, finding sufficient funds to maintain the current level of pension and health-care benefits is a major concern for many countries.

To investigate these issues, we looked at a group of late-career workers who chose to work for themselves or start small companies instead of retiring or remaining in their current jobs. We found that, despite making less money on average, becoming entrepreneurs triggered a significant increase in their quality of life. Entrepreneurship is not always about the money, and late-career individuals who voluntarily transition to it are generally better off.

To better understand the outcomes achieved by these workers, we compared individuals who switched to entrepreneurship with those who remained in their original employment, as well as with those who switched to another job as paid employees. This allowed us to examine how the individual’s levels of income and quality of life changed in response to a career transition.

Our data came from five biennial surveys conducted between 2002 and 2011 for the English Longitudinal Study of Aging funded by the UK government. The purpose of these surveys was to generate data useful for analyzing the dynamics of aging and the relationships between economic circumstances, physical and mental health, and social and psychological issues. We limited our sample to 2851 individuals aged 50–67 years who were resident in England and employed full time at the beginning of each survey. Among them, 115 switched to entrepreneurship, 464 switched to another job, and 2272 remained in the same job.

To analyze the data, we used a technique known as propensity score matching. This technique matches each member of the group being studied (late-career workers who switch from employment to entrepreneurship or a new job) with a virtually identical member of a control group (late-career workers who did not switch), and let us compare the changes in quality of life and income resulting from the switch. To ensure the closeness of the match, we considered, in addition to quality of life and income before the career switch, each person’s gender, age, physical and mental health, close social network, and overall financial wealth. Importantly, to measure quality of life accurately we computed a detailed index based on multiple indicators of autonomy, self-realization, control, and pleasure developed and thoroughly tested by gerontology scholars.

We found that switching to a new job increases the quality of life index compared with staying in the same job. However, the increase experienced by late-career workers switching to entrepreneurship is significantly larger, on average, than those experienced by all others. That is, transitioning to entrepreneurship increases quality of life significantly more compared with staying in the same job or switching to another paid job. Yet switching to entrepreneurship meant, on average, a significant reduction in income not observed in the other groups.

Previous research has focused exclusively on income considerations, which suggested that older workers may be less likely to engage in entrepreneurship than their younger counterparts. The financial benefits from starting a business tend to be risky and realized over time, often with significant delays. Older workers are therefore less likely to get a long-run financial gain from entrepreneurship. Our study points to a different story: When non-financial motives are added to the picture, entrepreneurship allows late-career workers to achieve a higher quality of life even if it comes at a significant cost in income.

Our analyses yielded some further results. 44% of people who switched to entrepreneurship worked as many or even more hours per week as they did before switching. Although based on a small number of cases, this result points to the possibility that late-career entrepreneurship is not always about making a phased withdrawal from the workforce. Rather, it may often be a way to benefit from increased opportunities for self-realization.

Our research suggests that governments should consider ways to help older workers move into entrepreneurship as a viable option, rather than retirement or staying in a work experience that is no longer satisfying. Late-career entrepreneurship can be socially sustainable because older workers undertaking such transitions are, on average, better off. While we do not know to what extent our results apply to other countries, a similar pattern is likely to emerge at least in other developed economies. Thus, late-career entrepreneurship can allow societies to move from supporting aging models that emphasize economic inactivity and dependence, toward active aging models that are better suited to address the personal needs of aging individuals.

Active aging models should encourage older workers to feel that entrepreneurship is an acceptable career move despite their age. Institutions have an important role in enabling this social change. Pension and tax systems should not penalize entrepreneurs, and lenders should not penalize older workers. Among other things, entrepreneurs tend to have longer working careers than employees and contribute significantly to the transferring of knowledge across age cohorts. All generations benefit from their continued presence in the work force.