Working Paper: CEPR ID: DP7628
Authors: Rachel Griffith; Gareth Macartney
Abstract: The theoretical effects of labour regulations such as employment protection legislation (EPL) on innovation is ambiguous, and empirical evidence has thus far been inconclusive. EPL increases job security and the greater enforceability of job contracts may increase worker investment in innovative activity. On the other hand EPL increases adjustment costs faced by firms, and this may lead to under-investment in activities that are likely to require adjustment, including technologically advanced innovation. In this paper we find empirical evidence that both effects are at work - multinational enterprises locate more innovative activity in countries with high EPL, however they locate more technologically advanced innovation in countries with low EPL.
Keywords: employment protection; innovation; multinational firm location
JEL Codes: D21; F23; J24; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High EPL (F31) | Increased job security (J63) |
| Increased job security (J63) | Enhanced worker effort (J29) |
| Enhanced worker effort (J29) | Increased overall innovation (O36) |
| High EPL (F31) | Increased overall innovation (O36) |
| High EPL (F31) | Increased adjustment costs (J32) |
| Increased adjustment costs (J32) | Decreased radical innovation (O39) |
| High EPL (F31) | Decreased radical innovation (O39) |