Employment Effects of Innovation over the Business Cycle: Evidence from European Countries

A growing literature has investigated how firms´ R&D and innovation behaviour react to changes in the business cycle. However, so far it has not been analysed to what extent the employment effects of innovation vary over the business cycle despite the literature has been stressing that these effects are largely driven by demand. This paper fills this gap by studying how the ability of firms to transform innovation into employment growth changes over the business cycle. The empirical analysis is based on the model of Harrison et al. (2014) and employs observations for about 234.000 manufacturing firms from 26 European countries over the period 1998-2010. The empirical evidence reveals that product innovations induce similar gross employment growth in all phases of the business cycle. The effect of product innovation on net employment growth is positive except in recessions when gains from new products cannot fully compensate losses in old products. However, employment losses are far lower than for non-product innovators. Process and organizational innovations reduce employment growth during economic up- and downturns implying labour displacement effects to exceed labour compensating effects. A sample split into different European country Groups shows regional heterogeneity concerning the effect of process and organizational innovations over the business cycle but not for product innovations.