Impact of innovation on employment and skill upgrading of firms

This paper adds to the literature by studying the impact of firms’ own technology and non-technology innovations as well as of innovation spillovers from vertically linked manufacturing and services industries on firms’ employment growth and skill upgrad-ing. We exploit unique representative samples of micro data for Spain and Slovenia for the period 1996 -2008. Our results show a substantial heterogeneity of innovation effects on employment and skill composition of labor. This implies that, first, the effects depend a lot on the specific structure of each economy, whereby results can vary substantially across industries that generate spillovers and across firms that are potential beneficiar-ies of the spillovers. And second, innovations in service industries do not seem to have a different spillover effect on employment and skill structure when compared to innova-tions in manufacturing industries.

Impact of innovation and globalization on polarization of the labour markets in Europe

The paper investigates the impact of innovation and globalization on observed Ushaped labour market polarization in 33 European countries in the period 1995- 2013. For these purposes Eurostat’s Labour Force Survey data is combined with data on R&D activity and international trade as well as with UNCTAD’s data on foreign direct investment. Three main findings can be deduced from our empirical research. First, innovation and R&D expenditures contribute to polarization in the higher end of the wage spectrum, but less so at the lower end. However, both became more important during the recent crisis period. Second, general imports seem to accelerate polarization at the lower end of the wage spectrum, while imports of Chinese low-tech products dampen theses effects by reducing employment of the lowest-paying occupations. And third, inward FDI seem to foster polarization in the labour market by increasing demand for labour at both sides of the wage spectrum, while relocation of production abroad via outward FDI moderates these polarization effects by reducing the demand for labour. These effects are aggravated during the crisis.

Multidimensional aspects of service innovation

In times of sluggish economic growth innovation is perceived as the key lever to re-introduce dynamism into the economy and eventually also revive employment growth. Yet, six years after the outbreak of the financial crisis, it becomes evident that the rising unemployment is among the biggest problems of slow recovery in a large number of European economies. Not only people with lower levels of education are affected but also the demand for highly educated workforce declined. The remedies introduced under the austerity programmes in the most severely hit EU economies to cope with the consequences of the crisis so far largely failed to boost economic activity and induce employment growth. Public policies are con-fronted with the difficult task to mitigate the unemployment problem that will need to be addressed with different mechanisms. In this setting, it is reasonable to recall that the bulk of new jobs in the European economies are created in the service sector or in service func-tions. This becomes highly relevant when considering the impact of innovation on growth and job dynamic in general and in services in particular. While the innovation dynamic in the service sector has benefited significantly from the in-formation communication technology that enables a variety of new services, organisational changes and new business models, the impact of service innovationd transcends the sectoral boundaries. Increasing interlinkages of services with manufacturing opens additional chan-nels through which innovation in services influences growth and employment. Manufactur-ing firms introduce services, new business models and other forms of non-technological in-novations related to their major offerings in order to complement and upgrade their value chains. Knowledge intensive business services (KIBS) play a critical role in these processes as the catalysts of innovation in the whole economy. A number of firm-level analyses confirm knowledge spillovers from KIBS and their facilitating role for innovation, productivity and export performance of manufacturing firms (see Deliverable 8.3., Stare, 2013).

In the last two decades the impact of innovation in services has been studied mostly from the perspective of economic growth and productivity gains. With some exemptions, the analyses of innovation influence largely overlooked the employment effects. While acknowledging multidimensional aspects of service innovation and the importance of productivity gains related to it, this paper focuses on the perspective of jobs and skills changes. Recently, we ob-serve greater interest in the topic that could be attributed to improved knowledge on service innovation and to better availability of data that capture different types of innovation. The impact of innovation in services on jobs takes effect directly and indirectly via firms‘growth. However, the final outcome depends on a larger set of determinants (compensation mecha-nisms) that pertain to competition, demand, labour market mechanisms, institutional framework, cross-industry linkages, etc. (Evangelista & Savona, 2003; Harrison et al., 2008; Bogliacino & Pianta, 2010; Evangelista& Vezzani, 2012; Vivareli, 2012). Compensation mechanisms may mitigate or reinforce the direct impact of innovation in services on jobs, depending on the interplay and strength of those mechanisms.

This paper aims to complement still scarce research in the field by taking into account mul-tidimensional effects of innovation in services on employment. The objectives of the paper are twofold. First, we evaluate the impact of firms’ own technological and non-technological innovations on employment and skills composition in manufacturing and in services firms. Secondly, we examine how innovation in the services sector affects employment in vertically linked manufacturing and service firms via spillover effects. In both cases the implications for skills composition is assessed as well. The focus is on two EU economies heavily affected by the crisis – Spain and Slovenia. We make use of two representative samples of micro (firm-level) data for both countries that include firms’ accounting data and data on innova-tion activity. These data are matched with the sectoral data on innovation from the Community Innovation Survey (CIS) and linked to micro data using the respective input-output tables for both countries. While micro data on firm innovation activities allow to account for firm own innovation, the latter enables us to assess the impact of innovation spillovers from ver-tically linked services sector on individual firm’s employment growth and changes in skill composition. To the best of our knowledge, these innovation spillover effects were so far not explored and present the major contribution of the paper.

The full paper is available for download on the right side.

Impact of innovation on employment and skill upgrading

This paper is co-authored by Črt Kostevc, University of Ljubljana, and Institute for Economic Research (IER); and Metka Stare, Institute of Economic Research (IER) and University of Ljubljana.

The paper investigates the dual effect of innovation on employment and skill upgrading in manufacturing and service industries. Based on the Harrison et al (2008) approach and using four waves of CIS data for the period 2004-2010 for 28 EU countries, we find that product innovation has a consistent positive effect on employment growth. This effect is larger for manufacturing industries. Process innovations are found to exhibit no
labour displacement effects, while organizational and marketing innovations reveal a consistent positive impact on employment. We also study the impact of innovation on skill upgrading and find that increasing the share of firms engaged in process innovation by 10 per cent will lead to an increase in share of high skilled labour by 2 per cent, while increasing the share of firms engaged in organizational and marketing innovation by 10
per cent will lead to an increase in share of high skilled labour by 4 per cent and an increase in share of scientific workers by 2 per cent. These effects of innovation on demand for skilled labour are, however, limited mainly to manufacturing sector, while in service industries these effects are lower by some 60 to 80 per cent. Finally, we also control for the impact of Chinese import penetration and find no significant impact on employment growth, but find a strong positive impact on skill upgrading. Our results indicate that increasing the share of Chinese imports in total imports by 10 per cent leads to an increase in share of high skilled labour by 2 per cent. These findings are consistent with the “trapped factor” model of innovation developed by Bloom et al (2011).