Job creation, technological innovation and adjustment costs

Costas Meghir, Annette Ryan and John van Reenen
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Annette Ryan: Institute for Fiscal Studies

No W95/06, IFS Working Papers from Institute for Fiscal Studies

Abstract: This paper compares the employment behaviour of innovative firms with those that are less technologically advanced. Innovation (by a company or its rivals) can affect job creation along many dimensions. Usually it is assumed that output will increase due to firms capturing higher market shares and that the factor mix may change if technology is non-neutral. We focus on a neglected argument - that innovation will affect the employment adjustment costs firm face. Using a panel dataset of 600 large British manufacturing firms we implement a symmetrically normalised method of moments estimator which is invariant to any normalisation rule. The parameter estimates from the Euler equation suggests that firms with a higher stock of innovations face lower adjustment costs of employment than less technologically progressive firms. This finding is consistent with the observation that innovative firms in our dataset have higher variance of employment over time - lower adjustment costs allow them to move more quickly to equilibrium levels of employment. It is also consistent with other studies which find that innovative firms are better able to protect profit margins during adverse demand shocks and that they have faster net employment growth.

Date: 1995-01-01
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