Do Innovative Firms Pay Higher Wages? : Micro-Level Evidence from Brazil

Several studies have documented a positive and causal relationship product or processinnovation -- and labor productivity. Given the links between labor productivity and wages, a likely implicationof this positive relationship is that innovation is associated with higher wages of more productive firms. Thispaper explores the relationship between innovation and wages using Brazil's employer-employee census and a novelmeasure of innovation derived from the share of technical and scientific occupations of workers in the firm. Theresults show a robust and positive wage premium associated with innovative firms. The decomposition of thisinnovation-related wage premium suggests a series of important stylized facts: (i) the innovation wage premium islarger for manufacturing but also positive and significant for agriculture and services; (ii) it is larger for largefirms, but also positive and significant for all firm size categories including micro firms; and (iii) it is larger formedium- and low-skill occupations, although this depends on the use of firm fixed effects. More importantly, the paperexplores the causality between innovation and wages and finds empirical support for the ideas that“self-selection†—firms that innovate already pay higher wages before becoming innovators -- and increases in wagesassociated with starting innovation activity, which are persistent for three years after firms start innovating.