Presentation session 3

Innovation, socio-ecological transition and the
labour market: do we understand the
Bart van Ark, Iulia Siedschlag, Maria Jepsen, Olaf van Vliet
Work packages 3 and 6
Brussels, 18 February 2013
• Implications of innovation for the
organisation of production and the
employment structure
• Labour market institutions and innovation
• The political economy of labour market
• Discussion
Implications of Innovation for the
Organisation of Production and the
Employment Structure
Goals of WP3
• Understand how economic growth and job
creation is developing amidst ongoing
innovations in the energy and ICT sectors
• Get a perspective on implications for the
organization of production (manufacturing,
services, etc.) and the structure of employment
(skills, wages)
• What are policy makers’ opportunities to
influence and facilitate the impact of ICT and
energy use on changes in the economy and
labor markets?
The Key Issues Being Addressed in WP3
• Information and Communication Technology
(ICT) and Energy Exploration and Savings as
General Purpose Technologies
• Impact on investment (current and new), Jobs
(hours and skills) and productivity (labour and
total factor productivity)
• Impact on changes in structure of growth and
jobs (by country, industry, skill and wage
categories, etc.)
• Model impact of policy instruments in
innovation and energy on growth
Papers being produced for WP3
• Bert Colijn, Recent changes in energy intensity dynamics in
Europe, The Conference Board (in collaboration with Peter
Mulder and Henri de Groot, Free University Amsterdam)
• Bart van Ark and Janet Hao, The role of intangible capital in
relation to ICT and energy use, The Conference Board, Europe
• Elena Ketteni, Theofanis Manumeas and Panos Pashardes, ICT
and Energy Use: Patterns of Substitutability and
Complementarity in Production, Europrism
• Maciej Bukowskiy and Pawel Kowal, On the endogenous directed
technological change in multi sector DSGE model: the case of
energy and emission efficiency, Institute for Structural Research
• Riccardo Massari, Paolo Naticchioni, Giuseppe Ragusa,
Unconditional and Conditional Wage Polarization in Europe,
• Moira Nelson, Low-wage service occupations in Europe, Free
University Amsterdam
Methods used
• Use growth accounting and other decomposition
techniques to obtain contributions from ICT and
energy to growth and structure (Colijn et al., van
Ark, et al.)
• Modeling techniques, such as production models
(Ketteni et al.) and dynamic stochastic general
equilibrium (DSGE) models (Bukowskiy and Kowalto)
to identify relationships (e.g. substitutability and
complementarity) between innovation, energy and
• Regression analysis to identify possible job and wage
polarization (Massari et al.) and emergence of lowwage service occupations (Nelson) in Europe
Data used
• An update and extension of the EU KLEMS database:
– Updates to 2010 for six European economies (UK, FI, DE, NL, ES,
IT) (see NEUJOBS website)
– ICT investment separated out as an asset
– Intangible assets will be added in a separate paper (Hao et al.,
– Extension of EU KLEMS from value added to gross output, by
adding energy, material and services inputs
– Further updates will be done by University of Groningen on a
rolling basis
• European Labor Force Survey (ELFS), European
Community Household Panel (ECHP) and European
Union Statistics on Income and Living Conditions (EUSILC)
Main findings on use of ICT and
energy in relation to growth
• Ketteni et al.:
– ICT and energy inputs both have significant positive effects on
technical efficiency levels
– There is a complementary relationship between ICT and non-ICT
capital, and between ICT and skilled labor, but ICT substitutes for
unskilled labor and materials
– Energy is a complement with ICT and non-ICT capital as well as skilled
and unskilled labor; and a substitute to material inputs
• Colijn et al.:*
– Energy intensity increase in a fairly wide range of services, but
decrease in most manufacturing industries
– The change towards services explains a considerable and increasing
part of aggregate energy intensity increase
• Van Ark et al.:*
– Intangible assets are complementary to ICT
– Is there a substitutability possible with energy use?
* Preliminary findings or hypotheses on basis of previous analysis
Main findings on structural
changes in the labor market
• Massari et al.:
– Job polarization, reflected in a hollowing out of middle skill
occupations characterized by routine tasks, has occurred in Europe,
mainly as a result of ICT (rather than offshoring)
– However, and in contrast to U.S., there are no wage polarization
effects from demographics, institutions or education in Europe
• Nelson:
– Low wage service occupations are expanding in most European
– Transition to service-oriented economies create more of those jobs
– Social transformations, such as higher female participation, play also a
– Employment levels go up with higher inequality, but non-wage costs
also play a positive role
Policy measures for energy and
emission efficiency
• Bukowski and Kowal:
– Energy price increase has a positive impact on R&D, investment
and growth
– An increase in carbon tax rates have qualitatively similar results
– Subsidizing green projects from emission fees supports both
environmental and economic objectives
Main policy implications
• If policy makers want to counter negative substitution effects of
technological change, such as decline in routine tasks, they
should do so without damaging complementary effects such as
high skilled labor.
• Intangible assets (training, other innovation) can possibly play a
role to avoid offsetting effects.
• Both ICT and energy savings can increase materials efficiency
• Service activities deserves special attention as low wage sectors
and intensive energy users
• Low wage labour does not need to be low quality if
accompanied by institutional and social innovations
• Despite job polarization, labor market institutions can avoid
wage polarization
• There are workable policy options on taxes which balance
environmental and economic objectives
Labour Market Institutions and
Research and Policy Context
• Innovation is a key driver of sustainable economic
growth and high living standards in the context of
intensified global competition
• Innovation performance vary across countries and
between industries
• Institutional settings and policies could foster or
discourage innovation
Policy Relevant Questions
• What effects do labour market institutions have on
innovation performance?
• Are these effects different for advanced and
catching-up economies?
• What policy messages could be drawn?
Research Papers and Methodology
• Employment Protection and Innovation Intensity, Gavin Murphy, Iulia
Siedschlag and John McQuinn, NEUJOBS WP D6.4, 2012
– Econometric analysis using difference-in-difference models to explain
the impact of employment protection legislation and other labour
market institutions on innovation intensity
– Country-industry panel data from OECD countries, 1990-1999
• Linking Labour Regimes and Technological Innovation in Central and
Eastern Europe: The Cases of Automotive and Software Industries, Miroslav
Beblavý, Lucia Kureková, Jan Drahokoupil, Martin Myant and Stefan
Domonkos, NEUJOBS WP D6.2, 2012
– Case studies based on (16) interviews in the Czech Republic, Hungary,
Key Messages
• The effects of labour market institutions on innovation
appear stronger:
– in advanced economies
– in industries with high propensity to adjust through job
reallocation and layoffs
• Targeted labour market deregulation in industries with
high propensity to adjust through job reallocation and/or
layoffs could foster innovation
• Labour market reforms are likely to affect significantly
innovation performance in the long-run only, while shortrun effects are unlikely to be sizeable
Employment Protection and Innovation:
Theoretical Background
Human Capital Investment
– Stricter employment protection legislation (EPL) increases job
security and incentivises investment in firm-specific and
industry-specific human capital and engagement in innovation
(Acemoglu 1997; Akerloff 1982; Belot et al.2007)
Adjustment Costs
– High hiring and firing costs increase adjustment costs and thus
can lead to underinvestment in innovations that require
adjustment (Saint-Paul 1997, 2002; Samaniego 2006; Cuñat and
Melitz 2010)
Employment Protection and Innovation:
Empirical Evidence
Direct Effects
• Positive link: Acarya et al. (2010)
• Negative link: Barbosa and Faria (2011)
Conditioned Effects
• Innovation Type Griffith and Macartney (2010)
– Positive link (incremental innovation )
– Negative link (radical innovation)
Industry Characteristics
– Competition (Aghion et al. 2001, 2005; Aghion and Griffith 2005)
– Distance to the technology frontier (Aghion at al. 2005, 2009)
– Technology and skills intensity (Saint Paul 1997; Samaniego 2006)
– Layoff propensity (Bassanini et al. 2009)
• Other Labour Market Institutions
– Wage setting institutions (Haucap and Wey 2004; Bassanini and Ernst 2002);
– Unionisation (Tauman and Weiss 1987; Ulph and Ulph 1994, 1998, 2001; MenezesFilho et al. 1998)
Employment Protection and Innovation Intensity:
Key Research Findings
In advanced economies, in industries with high job
reallocation rates (high layoff propensity):
• Stricter EPL led to significantly lower innovation intensity
• The strictness of employment regulations on the use of
temporary contracts had stronger effects on innovation
intensity than the strictness of EPL for regular contracts
• Other labour market institution effects
– the extent and duration of unemployment benefit systems
led to lower innovation intensity
– higher co-ordination and higher wage centralisation of
wage setting led to higher innovation intensity
• Results are robust to sensitivity checks
Key Policy Messages for Advanced Economies
• Targeted labour market deregulation in industries with high
propensity to adjust through job reallocation or layoffs could
foster innovation
• Facilitating greater use of temporary contracts in industries
with high propensity to adjust through job reallocation or
layoffs are likely to deliver relatively more innovation than
reforming the EPL for regular contracts
• Labour market reforms are likely to affect innovation
performance significantly in the long-run while short-run
effects are unlikely to be sizeable
Case Study Evidence from
Central and Eastern Europe
• Software industry
– especially successful in the Czech and Slovak Republics
– indigenous innovation
• Automotive industry
– dominated by multinational companies
– technology is imported
– Innovations originate elsewhere, they are adopted in
Central and Eastern European countries
Software Industry
• The role of labour regimes on the success of three
software (anti-virus) companies:
– human capital and its availability facilitated by labour
market regulations and skill formation was key to success
and moving up the global value chain
– other favourable factors: less competition from FDI, the
spread of online sales
– current labour market regulations provide both flexibility
and security
– alternatives to labour flexibility: internships, networks of
Automotive Industry
• Innovation linked to inward investment by multinational
• Employment relations and innovation are linked to the
location choice of multinational companies
• Demand for skilled and innovative labour force is less
• No major innovations in Central and Eastern Europe,
rather incremental changes and product adaptation
• The costs of legal frameworks, bargaining systems and
the strength of trade unions in Central and Eastern
Europe are offset by advantages of locations
Key Policy Messages for
New EU Member States
• Labour flexibility in the New EU Member States is perceived as
– linked to increased competitiveness and moving up the global
value chain
– a key factor for crisis survival (especially in the automotive
– relevant in cases where innovation requires labour adjustment
– provides incentives for employees and firms to invest in human
• Employment laws, rules and practices are not perceived as
obstacles to innovative firms in the software industry and to
production in the automotive industry
Key Messages
• The effects of labour market institutions on innovation
appear stronger:
– in advanced economies
– in industries with high propensity to adjust through job
reallocation and layoffs
• Targeted labour market deregulation in industries with
high propensity to adjust through job reallocation and/or
layoffs could foster innovation
• Labour market reforms are likely to affect significantly
innovation performance in the long-run only, while shortrun effects are unlikely to be sizeable
Further Relevant Issues/Questions
• Social protection measures are needed to offset
possible negative effects of labour market reforms on
employment and income
• Is the impact of labour market institutions on
innovation conditioned by the state of the economy –
booms versus downturns?
• Does the type of innovation matter –technological
versus non-technological innovation?
The political economy of labour
market institutions
Labour market institutions
• Reform of labour market institutions
(Paper: Van Vliet, Caminada and Goudswaard, NEUJOBS D6.3, 2012)
• Institutions are often treated as isolated policy instruments, but
they are embedded in a large number of welfare state institutions
• Unemployment benefits and employment protection are often
regarded as substitutes
• Flexicurity: a package of policy reforms
– Unemployment benefits
– Employment protection
– Active labour market policies
Partisan politics
• Left-wing versus right-wing parties
• Empirical evidence is mixed (Iversen and Cusack, 2000;
Huber and Stephens, 2001; Allan and Scruggs, 2004)
Deteriorating economic situations:
• cuts in unemployment benefits by rightist and leftist
parties (Vis, 2009)
• Both parties expand spending at high levels of
unemployment (Jensen, 2012)
Employment relations
Generally, a positive effect of a corporatist tradition of
coordinated bargaining by strong and centrally organized
social partners (Ebbinghaus and Hassel, 2005; Swank, 2011):
– Unions exchange wage moderation for full employment
commitments and expansions in unemployment
– Collective bargaining at the national level: social partners
are able to resist welfare state retrenchments
Employment relations (2)
A lot of variation within Eastern Europe, but in general
Social partners are less effective in Eastern Europe than in
Western Europe (Ost, 2000; Hassel, 2009):
Corporatism regarded as a way of providing public support
for economic reforms
Labour unions almost only present in (formerly) stateowned enterprises
Unemployment benefits
• Unemployment replacement rate dataset among 34 welfare
states 1971-2009
(Van Vliet and Caminada 2012; see NEUJOBS website)
• Update and extension of Scruggs (2005)
• Net replacement rates: from gross to net
• Two household types
Net unemployment replacement rates
Key findings
 Some convergence of unemployment benefit levels
 Negative association between the strictness of employment
protection legislation and the generosity of unemployment
benefits; no significant effect of active labour market policies
 Left-wing governments are positively related to
unemployment benefit replacement rates; this effect
becomes smaller at higher unemployment rates
 Coordinated bargaining by strong and centrally organized
labour unions is positively related to benefit generosity
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