Jože P. Damijan, Črt Kostevc & Metka Stare

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, we first study which of the effects – displacement vs. compensation effect – prevails in the impact of innovation on employment growth. In doing so, we distinguish between technological (product and process) and non-technological innovation (organizational and marketing). We make use of four waves of CIS data for the period 2004-2010 for 23 EU countries and estimate the empirical models using country-industry data.

We find that product innovation, as reflected in differential output growth of the new products, has a consistent positive effect on employment growth. This effect is similar for manufacturing and service industries. *

Process innovations are found to exhibit no labor-displacement effects neither in manufacturing nor in service industries. On the other hand, organizational and marketing innovations reveal a consistent positive impact on employment.

We also find that product, process, organizational and marketing innovation have substantial positive impacts on skill demand in manufacturing sector. For instance, we 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 labor 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 labor by 4 per cent and an increase in share of scientific workers by 2 per cent. These effects of innovation on demand for skilled labor are, however, limited mainly to manufacturing sector. We find that in service industries, these effects are lower by some 60 to 80 per cent.

Finally, when studying both issues we also control for the impact of Chinese import penetration. While no significant impact of Chinese import competition on employment growth is found in manufacturing industries, a strong positive impact on skill upgrading is revealed. 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 labor by 2 per cent. These findings are consistent with the “trapped factor” model of innovation developed by Bloom et al (2011).

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* Full paper is available here