The Impact of Technological Change on Employment: A Composite Indicator Approach

generally a consensus remains elusive regarding the optimal method for measuring the effects of technological change and innovation on employment. This study introduces a Technological Change Composite Indicator (TCI), constructed using Principal Component Analysis (PCA) to synthesize seven firm-level innovation metrics. This methodology mitigates issues associated with multicollinearity in regression analyses involving correlated variables. The proposed TCI serves as a proxy for technological change to examine its association with employment in manufacturing sectors across 10 European Union countries and 17 seventeen manufacturing sectors with country fixed effects and a one‑year time lag. We find that a one‑unit increase in the TCI corresponds to a 0.58% higher employment level. The association is positive and statistically significant, indicating that a multidimensional measure of technological change outperforms traditional single proxies such as R&D expenditure or patent counts. By moving beyond narrow indicators, our approach offers a more reliable empirical basis for understanding the employment implications of technological change, including emerging technologies such as AI.