Labor market reform and innovation: Evidence from Spain

•We analyze the effects of a labor market reform in Spain on innovation.•We find positive effects on product innovation in small firms affected by the reform.•Positive effects are concentrated in industries with high R&D intensity, high demand uncertainty and a high share of labor costs.•The ref...

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Bibliographic Details
Published in:Research policy 2021-06, Vol.50 (5), p.104213, Article 104213
Main Authors: García-Vega, María, Kneller, Richard, Stiebale, Joel
Format: Article
Language:English
Subjects:
EPL
Innovation
Labor market reform
New products
Productivity
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Summary:•We analyze the effects of a labor market reform in Spain on innovation.•We find positive effects on product innovation in small firms affected by the reform.•Positive effects are concentrated in industries with high R&D intensity, high demand uncertainty and a high share of labor costs.•The reform also induced firms to enter new markets and undertake other risky investments such as an upgrading of product quality. We analyze the effect of a labor market reform on firms’ product innovation. The reform, which amounts to a natural experiment, differentially reduced firing costs for some firms, thereby lowering adjustment costs in the presence of demand uncertainty. Using a difference-in-differences framework, we show that the reform increased product innovations. We also provide evidence that the reform induced upgrading of product quality and enabled firms to grow faster and enter new markets. The effects are concentrated in industries with high levels of demand volatility and R&D intensity, where flexible adjustments to unexpected shocks are important.
ISSN:0048-7333
1873-7625
DOI:10.1016/j.respol.2021.104213