Demographic change and entrepreneurship: General equilibrium implications for economic dynamism

Rapid aging and population decline pose a fundamental threat to economic dynamism. Using South Korea as a case study, this paper investigates how these demographic shifts erode entrepreneurship. We identify a critical but often overlooked mechanism, where the primary driver of decline is the rising price of labor induced by severe scarcity. As the workforce contracts, real wages rise significantly, increasing the opportunity cost of entrepreneurship. This shift generates “entrepreneurial brain drain” by raising the capability threshold for market entry; capable individuals who would otherwise create productive firms move into wage employment. Our analysis shows that this wage-driven selection effect accounts for 91.7% of the decline in the entrepreneurship rate, far outweighing demographic composition effects. Consequently, the economy experiences a sharp contraction in the extensive margin of firms, ultimately reducing long-run per capita gross domestic product by 28.6%. However, welfare analysis reveals a contrasting outcome: the same wage increase that erodes aggregate dynamism improves individual welfare, as higher labor income more than compensates newborn cohorts for the burden of increased longevity. We conclude that aging economies risk a “missing generation” of firms, as rising opportunity costs create a structural barrier to entry, highlighting a fundamental tension between aggregate dynamism and individual well-being.