The Impact of The Aging Workforce on Innovation and Productivity

2 min read

This study, from Japan's Research Institute of Economy, Trade and Industry, entitled "Empirical analysis of the impact of aging of the workforce on innovation and productivity," should be of interest to people beyond Japan as the whole of the developed world is now facing an aging workforce and lower birthrates. 

The study used patent applications to measure innovation over time, which we can agree or disagree with. The main findings were:

1. Since the 1970s, the average age of employees at listed companies has continued to rise, while the average length of service has not changed significantly.

2. A rise in the average age of employees increases productivity, but after age 45, it has a negative effect, creating an inverted U-shape.

3. Growth in the average length of service of employees continues to increase corporate productivity, not in an inverted U-shape but in a straight line with an upward slope.

4. We also analyzed the impact of aging on productivity by company age. For relatively young companies (up to 50 years old), years of service plays a more important role in productivity than the average age of employees, but for relatively older and mature companies (over 50 years old), the average age of employees plays a more important role in productivity. However, no significant relationship could be confirmed between longer average years of employment and increased productivity. The effects of average employee age and average length of service on productivity are thought to vary depending on company attributes such as company age.

5. Innovations captured in patents can be characterized by quantity (number of patent applications), quality (number of citations within 5 years after filing), novelty (number of AI and robot patent applications), and scalability (past and current patent portfolios). (Issuing patents in new fields rather than similar ones), the rise in the average age of employees makes a positive contribution, while the longer years of employment have a negative effect.

6. Both the average age and average years of employment of employees have a positive relationship with increases in average wages, but the age effect is larger than the effect of years of employment.

Bottom Line: Because longer years of service greatly contribute to the productivity of companies (especially relatively young companies), the aging of employees with longer years of service may not reduce productivity. It is important that we emphasize that the key factor here is the length of service in a company, so older employees who do not have as much "time in grade" at a firm may have different productivity outcomes. 

There are, of course, factors that were not addressed in this study, including the role of future technologies such as AI, which may impact overall productivity and the relative productivity of employees with different levels of experience and knowledge. With the ability to remove a lot of busy work, allowing employees to concentrate only on what matters, AI may accentuate the value of tenured, experienced, older employees even more. We'll just have to wait to see how this plays out. 

Link to original study: https://www.rieti.go.jp/jp/publications/nts/23j036.html

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Article originally published in Steve's LinkedIn Newsletter HR Asia October 2, 2023

Posted on October 2, 2023
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