Is labour market flexibility harmful to innovation?

Abstract

In a neoclassical framework one can argue that unemployment can be reduced by means of institutional changes that allow for a better working of the labour market nd, notably, by achieving downward wage flexibility. I argue that although various policy recommendations about removing labour market rigidities are indeed advantageous in the short trun, they are detrimental from a Schumpeterian perspective, since they discourage product and process innovation. Reduced innovation efforts will in turn weaken the supply-side strength of an economy. The paper explores the implications of Schumpeter's notion of creative destruction and of Schmookler's hypothesis of demand-putted innovations, borrowing from recent empirical innovation research.

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