Is Labour Market Flexibility Harmful to Innovation?

Alfred Kleinknecht

Cambridge Journal of Economics, 1998, vol. 22, issue 3, 387-96

Abstract: In a neoclassical framework, one can argue that unemployment can be reduced by means of institutional changes that allow for a better working of the labor market and, notably, by achieving downward wage flexibility. The author argues that, although various policy recommendations about removing labor-market rigidities are indeed advantageous in the short run, they are detrimental from a Schumpeterian perspective since they discourage product and process innovation. Reduced innovation efforts will in turn weaken the supply-side strength of an economy. The paper explores the implications of Schumpeter's notion of creative destruction and of Schmookler's hypothesis of demand-pulled innovations, borrowing from recent empirical innovation research. Copyright 1998 by Oxford University Press.

Date: 1998
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