More labour market flexibility for more innovation? Evidence from employer-employee linked micro data

This paper examines labour market flexibility in various definitions and its impact on innovation. The results demonstrate that the relationship strongly depends on the type of innovation as well as the predominant innovation regime in which a company operates. Thereby, labour market flexibility does not influence innovation in an entrepreneurial innovation regime characterised by high competition, low market entry barriers and generally available knowledge. That might explain why the Silicon Valley has been successful despite of having a labour market with a strong strong hire and fire mentality. In contrast, labour market flexibility significantly reduces the likelihood of innovation in a routinised innovation regime with leading innovators and high entry barriers similar to the US automobile industry and steel districts that did not succeed. These findings emphasise that the currently discussed structural labour market reforms might hamper innovation as technological change still requires a level of security and stability.