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Labor Laws and Innovation

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  • Acharya, Viral V.
  • Baghai-Wadji, Ramin
  • Subramanian, Krishnamurthy

Abstract

Can stringent labor laws be efficient? Possibly, if they provide firms with a commitment device to not punish short-run failures and thereby incentivize the pursuit of value-maximizing innovative activities. In this paper, we provide empirical evidence that strong labor laws indeed appear to have an ex ante positive incentive effect by encouraging the innovative pursuits of firms and their employees. Using patents and citations as proxies for innovation and a time-varying index of labor laws, we find that innovation is fostered by stringent labor laws, especially by laws governing dismissal of employees. We provide this evidence using levels-on-levels, changes-on-changes, and finally difference-in-difference regressions that exploit staggered country-level law changes. We also find that stringent labor laws disproportionately influence innovation in those sectors of the economy that are more innovation intensive. Finally, we find that while the overall effect of stringent labor laws is to dampen economic growth, laws that govern dismissal of employees are an exception: dismissal laws promote economic growth, consistent with the evidence that they encourage firm-level innovation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7171.

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Date of creation: Feb 2009
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Handle: RePEc:cpr:ceprdp:7171

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Keywords: Entrepreneurship; Growth; Labor laws; Law and finance; R&D; Technological change;

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References

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Citations

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Cited by:
  1. Viral V. Acharya & Ramin P. Baghai & Krishnamurthy V. Subramanian, 2014. "Wrongful Discharge Laws and Innovation," Review of Financial Studies, Society for Financial Studies, vol. 27(1), pages 301-346, January.
  2. Betcherman, Gordon, 2014. "Labor market regulations : what do we know about their impacts in developing countries ?," Policy Research Working Paper Series 6819, The World Bank.
  3. Lisa D. Cook & Chaleampong Kongcharoen, 2010. "The Idea Gap in Pink and Black," NBER Working Papers 16331, National Bureau of Economic Research, Inc.
  4. Xiao, Sheng & Zhao, Shan, 2012. "Financial development, government ownership of banks and firm innovation," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 880-906.
  5. Xiao, Gang, 2013. "Legal shareholder protection and corporate R&D investment," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 240-266.
  6. Michele Battisti & Filippo Belloc & Massimo Del Gatto, 2012. "Unbundling Technology Adoption and TFP at the Firm Level. Do Intangibles Matter?," Working Paper Series 71_12, The Rimini Centre for Economic Analysis.
  7. Sander Wennekers & al et, 2014. "Entrepreneurship in the Netherlands - The Top sectors," Scales Research Reports A201417, EIM Business and Policy Research.
  8. Matteo Bugamelli & Luigi Cannari & Francesca Lotti & Silvia Magri, 2012. "The innovation gap of Italy’s production system: roots and possible solutions," Questioni di Economia e Finanza (Occasional Papers) 121, Bank of Italy, Economic Research and International Relations Area.
  9. Deakin, Simon, 2013. "Addressing labour market segmentation : the role of labour law," ILO Working Papers 483448, International Labour Organization.
  10. Deakin, S. & Sarkar, P., 2011. "Indian Labour Law and its Impact on Unemployment, 1970-2006: A leximetric study," ESRC Centre for Business Research - Working Papers wp428, ESRC Centre for Business Research.
  11. Barbosa, Natália & Faria, Ana Paula, 2011. "Innovation across Europe: How important are institutional differences?," Research Policy, Elsevier, vol. 40(9), pages 1157-1169.
  12. Martin, John P. & Scarpetta, Stefano, 2011. "Setting It Right: Employment Protection, Labour Reallocation and Productivity," IZA Policy Papers 27, Institute for the Study of Labor (IZA).
  13. Murphy, Gavin & Siedschlag, Iulia & McQuinn, John, 2012. "Employment Protection and Innovation Intensity," Papers WP445, Economic and Social Research Institute (ESRI).
  14. Campos, Nauro F & Nugent, Jeffrey B., 2012. "The Dynamics of the Regulation of Labor in Developing and Developed Countries since 1960," IZA Discussion Papers 6881, Institute for the Study of Labor (IZA).
  15. Petar Stankov, 2010. "Deregulation, Economic Growth and Growth Acceleration," CERGE-EI Working Papers wp424, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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