Working Paper: NBER ID: w16484
Authors: Viral V. Acharya; Ramin P. Baghai; Krishnamurthy V. Subramanian
Abstract: Stringent labor laws can provide firms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify this effect by exploiting the time-series variation generated by staggered country-level changes in dismissal laws. We find that within a country, innovation and economic growth are fostered by stringent laws governing dismissal of employees, especially in the more innovation-intensive sectors. Firm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act confirm the cross-country evidence.
Keywords: labor laws; innovation; patents; economic growth
JEL Codes: F30; G31; J08; J5; K31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stronger dismissal laws (K31) | greater innovation (O35) |
| stronger dismissal laws (K31) | greater innovation in innovation-intensive sectors (O35) |
| stronger dismissal laws (K31) | increased R&D investment (O39) |
| stronger dismissal laws (K31) | improved firm performance (L25) |
| stronger dismissal laws (K31) | enhanced economic growth (O49) |
| dismissal laws governing employee dismissal (J63) | greater impact on innovation than other labor law components (K31) |