Impact of innovation on employment and skill upgrading of firms

<em>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.</em> 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).