Supply-side economists made numerous pleas for removing labour market rigidities through ‘structural reforms’. From a Schumpeterian viewpoint, however, one can argue that labour market rigidities create useful incentives for innovation. Our estimates on German panel data (2007–2015) support the Schumpeterian view. Using the taxonomy of industries by Peneder (2010) we find that evidence of the Schumpeterian view is particularly strong in R&D intensive manufacturing industries, as well as in service industries with high degrees of cumulativeness of knowledge. Evidence of the Schumpeterian view is weaker in low-technology industries and in start-ups when firms rely more on generally available knowledge rather than on firm-specific and tacit knowledge accumulated in the past.

Innovation, Labour market flexibility, Varieties of capitalism
Labor Management Relations; Industrial Jurisprudence (jel J53), Labor Management (team formation, worker empowerment, job design, tasks and authority, job satisfaction) (jel M54), Innovation and Invention: Processes and Incentives (jel O31),
Research Policy
Erasmus University Rotterdam

Hoxha, S. (Sergei), & Kleinknecht, A. (2020). When labour market rigidities are useful for innovation. Evidence from German IAB firm-level data. Research Policy, 49(7). doi:10.1016/j.respol.2020.104066