Does Innovation Stimulate Employment? A Firm-Level Analysis Using Comparable Micro-Data From Four European Countries

There are different mechanisms through which product and process innovations can stimulate or destroy employment. This paper investigates whether a common pattern in the link between innovation and employment exists among four large European countries Germany, France, Spain and the UK. Despite the ongoing globalisation and European integration, firms in these countries still operate, at least partly, in different economic and institutional environments, which is especially true for the service sector. Differences for instance in national market structures might have an impact pertaining to the extent to which firms pass on cost reductions due to process innovations to their customers and thus on the amount of compensating effects. Indeed, these countries have demonstrated a very different economic development since the mid nineties in terms of employment growth and unemployment rates. To answer the question a new theoretical multi.product model is developed and estimated for the four countries using internationally harmonised Community Innovation Surveys (CIS) data. One main aspect of the model is that it establishes a theoretical link between employment growth and innovation output in terms of the sales growth generated by new products as well as efficiency gains attributable to process innovations. Overall, the econometric results are similar across countries, although there emerge some interesting differences. We show that in manufacturing as well as in the service sector product innovations have a positive impact on gross employment in innovating .rms. Our findings provide evidence that an increase in the sales growth due to new products by one per cent leads to an increase in gross employment by one per cent. At the same time, new products can displace existing ones within the innovating firm to a considerable extent which leads to downsizing. The decomposition of employment growth, however, corroborates that the net effect is positive and that product innovations have been the major driver of employment growth in all four countries. The higher average employment growth rates in France, Spain and the UK compared to Germany can be largely explained by higher output growth rates in existing products: While in Germany employment growth can be solely (manufacturing) or for the most part (services) attributed to the introduction of new products, it is likewise the output growth in existing products which substantially contributes to a raise in employment in the other three countries. Our results further show that displacement effects induced by productivity growth in the production of old products are large, while those associated with process innovations, which are likely to be compensated by price decreases, appear to be small. Overall, the impact of process innovations on employment growth turns out to be variable. They are labour.saving in the British and German manufacturing. However, we find no evidence for a displacement effect of process innovation in Spanish manufacturing, possibly due to greater pass-through of productivity improvements in lower prices. In the service sector, we find no evidence of displacement effects from process innovation in all four countries.

Harrison, Rupert, Jordi Jaumamdreu, Jacques Mairesse and Bettina Peters (2008), Does Innovation Stimulate Employment? A Firm-Level Analysis Using Comparable Micro-Data From Four European Countries, ZEW Discussion Paper No. 08-111, Mannheim.