By Joze Damijan, University of Ljubljana
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.