ifo Institute for Economic Research at the University of Munich Employment Effects of Innovation at the Firm Level Stefan Lachenmaier *, Horst Rottmann ♦ * Ifo Institute for Economic Research at the University of Munich ♦ University of Applied Sciences Amberg-Weiden and Ifo Institute 3. Konferenz für Sozial- und Wirtschaftsdaten, Mai 2006, Wiesbaden

ifo Institute for Economic Research at the University of Munich The Research Question Do innovations have a significant effect on employment? Concentrate on the analysis of long-term effects

ifo Institute for Economic Research at the University of Munich Motivation Theoretical contributions show different results –Product innovations: increase demand  increase employment level  decrease competition  increase market power  reduce output  decrease employment –Process innovations: increase labour productivity  decrease employment level  lower costs  lower prices  higher demand  stimulate emplyoment  Overall effect is depending on elasticity of demand Empirical evidence is necessary Panel studies are rare due to the lack of appropriate data

ifo Institute for Economic Research at the University of Munich Main Idea Exploit long innovation panel data set Distinguish between product and process innovations Introduce different innovation categories

ifo Institute for Economic Research at the University of Munich Related Literature Theoretical Contributions: –Petit (1995) –Stoneman (1984), Hamermesh (1993) Empirical Contributions: –Chennels / Van Reenen (1999) –Cross-Sectional Analyses: Zimmermann (1991), König et al. (1995) –Employment Growth Analyses: Brouwer et al. (1993), Blanchflower/ Burgess (1999), Blechinger et al. (1998) –Panel Analyses: Smolny (1998), van Reenen (1997), Rottmann/Ruschinski (1998)

ifo Institute for Economic Research at the University of Munich Database Ifo Innovation Survey Panel Structure: (unbalanced) German Manufacturing Sector ~1300 observations per year Contains information on: –Innovation: Product and Process Innovation, Innovations introduced, Innovation expenditure –Firm characteristics: firm size, NACE, German states, turnover Control variables added on sector level (2digit NACE)

ifo Institute for Economic Research at the University of Munich Empirical Model Modelling employment adjustment process is complex, esp. for small firms (e.g. Hamermesh / Pfann 1996) Labour demand reacts slowly to changes in innovation behaviour Estimating long-term effects: Following Blanchard / Wolfers (2000), Nickell (1997, 2003) –Calculating averages for 4-(and 5-year periods) –Use period averages for panel analysis (time index t indicates period)

ifo Institute for Economic Research at the University of Munich Estimation L: Labour demandT: Technology Q: Product qualityX: Controls Level Equation: Linear Equation in differenced log values: - transformed into growth rates - allows to introduce innovation variables - Eliminates unobservable firm effect

ifo Institute for Economic Research at the University of Munich  w: Growth of Real Hourly Wage Rate (sectoral)  g: Growth of Real Gross Value Added (sectoral) e it : log of employment start level Estimation Equation:  Pc : Process Innovation (proxy for  t)  Pd : Product Innovation (proxy for  q) Remember: -Variables are expressed in averages over periods

ifo Institute for Economic Research at the University of Munich The problem of endogeneity Potential contemporaneous correlation of innovation and error term resulting from a shock simultaneously affecting employment and innovation IV Strategy –So far we tested Innovation Impulses, Innovation Obstacles, lagged values –No robust results: Either instruments are not good (low significance in first stage) or not valid (Sargan test)

ifo Institute for Economic Research at the University of Munich Descriptive Statistics Until 1990: Former West Germany, since 1991: Germany Unbalanced panel: 9142 „observations“, 4567 different firms, 5 time categories

ifo Institute for Economic Research at the University of Munich Regressions I

ifo Institute for Economic Research at the University of Munich Regressions II

ifo Institute for Economic Research at the University of Munich Regressions III

ifo Institute for Economic Research at the University of Munich Regressions IV

ifo Institute for Economic Research at the University of Munich Summary Innovations show positive effects on employment growth True for product as well as process innovations. Process innovations show even higher effect No additional effect for R&D based innovations Additional effect for product innovations which involved patent applications Further Research: Dynamics of adjustment process