Labor Laws and Innovation
46 Pages Posted: 27 Jan 2009 Last revised: 22 Dec 2013
Date Written: January 26, 2009
We provide empirical evidence that strong dismissal laws appear to have a positive eﬀect on the innovative pursuits of ﬁrms and their employees. Stringent labor laws provide ﬁrms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify the eﬀect of dismissal laws by exploiting the time-series variation generated by staggered country-level law changes. Using ﬁxed eﬀect panel regressions and diﬀerence-in-diﬀerence tests, we ﬁnd that innovation is fostered by stringent laws governing dismissal of employees. In addition, stringent dismissal laws disproportionately inﬂuence innovation in the more innovation-intensive sectors of the economy. Finally, we complement our cross-country results with ﬁrm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notiﬁcation Act.
Keywords: Labor laws, R&D, Technological change, Law and finance, Entrepreneurship, Growth
JEL Classification: F30, G31, J5, J8, K31
Suggested Citation: Suggested Citation