Boosting Productivity Via Innovation and Adoption of New Technologies: Any Role for Labor Market Institutions?

Abstract

This paper presents empirical evidence on the determinants of industry-level multifactor productivity growth. We focus on "traditional factors", including the process of technological catch up, human capital and R&D as well as institutional factors affecting labor adjustment costs. The analysis is based on harmonized data for 17 manufacturing industries in 18 OECD economies over the past two decades. The disaggregated analysis reveals that the process of technological convergence takes place mainly in low-tech industries, while in hightech industries, country leaders tend to pull ahead of the others. The link between R&D activity and productivity also depends on technological characteristics of the industries: while there is no evidence of R&D boosting productivity in low-tech industries, the effect is strong in high-tech industries, but the technology leaders tend to enjoy higher returns on R&D expenditure compared with followers. There is also evidence in the data that high labor adjustment costs (proxied by the strictness of employment protection legislation) can have a strong negative impact on productivity. In particular, when institutional settings do not allow wages or internal training to offset high hiring and firing costs, the latter reduce incentives for innovation and adoption of new technologies, and lead to lower productivity performance. Albeit drawn from the experience of industrial countries, this result may have relevant implications for many developing economies characterized by low relative wage flexibility and high labor adjustment costs.

Keywords: productivity, convergence, employment protection, industrial relations, panel data

JEL Classification: L51, O33, C23, J32