Employment quality, economic performance and wages in Europe. Exploring the virtuous circle

This paper investigates the existence of a virtuous circle between industries’ employment quality, the ability to introduce new products, increase labour productivity and pay higher wages. We first present descriptive evidence of these trends in Europe. We then develop a simultaneous four-equation model investigating empirically four related variables: first, the rise of non-standard work as a proxy of low employment quality; second, the success of firms in translating their R&D efforts into new products and services; third, labour productivity growth driven by technological activities; fourth, wage increases and the factors supporting their rise. The model is tested empirically for 41 manufacturing and service sectors of six European economies (Germany, France, Italy, Spain, the Netherlands, and the UK) over the period 1996-2016. The findings provide novel evidence of mutually reinforcing relationships, where higher employment quality complements technological activities, leading to more product innovations that increase productivity growth. In turn, the latter allows wage increases that contribute to higher employment quality, resulting in a good jobs-high innovation virtuous circle.