Innovation, socio-ecological transition and the labour market: do we understand the interaction?

1. Innovation, socio-ecological transition and the labour market: do we understand the interaction? Bart van Ark, Iulia Siedschlag, Maria Jepsen, Olaf van Vliet Work packages 3 and 6 Brussels, 18 February 2013

3. Outline • Implications of innovation for the organisation of production and the employment structure • Labour market institutions and innovation • The political economy of labour market institutions • Discussion

4. Implications of Innovation for the Organisation of Production and the Employment Structure

5. 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?

6. 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

7. 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, TheofanisManumeas and PanosPashardes, ICT and Energy Use: Patterns of Substitutability and Complementarity in Production, Europrism • MaciejBukowskiy and PawelKowal, 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, LUISS • Moira Nelson, Low-wage service occupations in Europe, Free University Amsterdam

8. 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 (Bukowskiyand Kowalto) to identify relationships (e.g. substitutability and complementarity) between innovation, energy and growth • Regression analysis to identify possible job and wage polarization (Massari et al.) and emergence of low-wage service occupations (Nelson) in Europe

9. 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., upcoming) • 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 (EU-SILC)

10. 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

11. 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 countries • Transition to service-oriented economies create more of those jobs • Social transformations, such as higher female participation, play also a role • Employment levels go up with higher inequality, but non-wage costs also play a positive role

12. 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

13. 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

14. Labour Market Institutions and Innovation

15. 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

16. 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?

17. 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, Slovakia

18. 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 short-run effects are unlikely to be sizeable

19. 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)

20. 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; Menezes-Filho et al. 1998)

21. 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

22. 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

23. 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

24. 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 subcontractors

25. Automotive Industry • Innovation linked to inward investment by multinational companies • Employment relations and innovation are linked to the location choice of multinational companies • Demand for skilled and innovative labour force is less important • 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

26. Key Policy Messages for New EU Member States • Labour flexibility in the New EU Member States is perceived as being: • linked to increased competitiveness and moving up the global value chain • a key factor for crisis survival (especially in the automotive industry) • relevant in cases where innovation requires labour adjustment • provides incentives for employees and firms to invest in human capital • Employment laws, rules and practices are not perceived as obstacles to innovative firms in the software industry and to production in the automotive industry

27. 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 short-run effects are unlikely to be sizeable

28. 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?

29. The political economy of labour market institutions

30. Labour market institutions • Reform of labour market institutions(Paper: Van Vliet, Caminada and Goudswaard, NEUJOBS D6.3, 2012) • Institutions are oftentreated as isolated policy instruments, but they are embedded in a large number of welfare state institutions • Unemployment benefits andemploymentprotection are oftenregarded as substitutes • Flexicurity: a package of policy reforms • Unemployment benefits • Employmentprotection • Active labour market policies

31. 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)

32. 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 protection • Collective bargaining at the national level: social partners are able to resist welfare state retrenchments

33. Employment relations (2) • A lot of variationwithinEastern Europe, but in general • Social partners are lesseffective in Eastern Europe than in Western Europe (Ost, 2000; Hassel, 2009): • Corporatismregarded as a way of providing public support foreconomicreforms • Labour unionsalmostonly present in (formerly) state-ownedenterprises

34. 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

35. Net unemployment replacement rates

36. 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

37. Discussion

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