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Processing Immigration Shocks: Firm Responses on the Innovation Margin

Rowena Gray (), Giulia Montresor and Greg Wright ()

No 6624, CESifo Working Paper Series from CESifo Group Munich

Abstract: The extent to which firms respond to labor supply shocks has important implications for local and national economies. We exploit firm-level panel data on product and process innovation activities in the United Kingdom and find that the large, low-skill labor supply (immigration) shock generated by the 2004 expansion of the European Union to Eastern European countries increased process innovation and reduced product innovation. This implies that the innovation response to labor supply shocks may be more nuanced than previous literature has suggested. Both of these effects are increasing in the low-skill intensity of firm production as well as firm size. In addition, the reduction in product innovation is lessened for firms whose output is sold locally. We interpret this last finding as evidence in favor of a demand side effect that mitigates the overall decline in product innovation generated by the labor supply shock. We present a model that illustrates the channels through which firms may respond to labor supply shocks, and find that our results are mostly consistent with the model’s predictions.

Keywords: product innovation; process innovation; immigration; labor supply shocks (search for similar items in EconPapers)
JEL-codes: J23 J61 F22 O31 O33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-cta
Date: 2017
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