Employment Protection and Innovation Intensity

We examine the impact of the strictness of employment protection legislation on innovation intensity. To this purpose, we use a panel of annual data from OECD countries over the period 1990-1999 and estimate difference-in-differences models to explain the variation of innovation intensity within country between industries. Our estimates indicate that stricter employment protection legislation led to significantly lower innovation intensity in industries with a higher job reallocation propensity. Further, we find that the strictness of employment regulations on the use of temporary contracts had a stronger impact on innovation intensity than the strictness of employment protection for regular contracts. Our findings are robust to additional industry covariates and other labour market institutions that may affect innovation performance and industry job reallocation propensity. In addition, our sensitivity analysis indicates that our results are not driven by the measures of employment protection legislation and industry layoff propensity that we use or any country in our sample.