Does innovation stimulate employment? A firm-level analysis using comparable micro-data from four European countries

We study the impact of process and product innovations introduced by firms on employment growth with random samples of manufacturing and services from France, Germany, Spain and the UK for 1998-2000, totaling about 20,000 companies. We develop and estimate a model relating firms' and industry's employment to innovation, that leads us to the conclusions that follow. Trend increases in productivity reinforced by process innovation are an important source of reduction of employment requirements for a given output, but the growth of demand for the old products tends to overcompensate these displacement effects. The switch of production towards new products does not reduce employment requirements, and the growth of the demand for the new products is the strongest force behind employment creation. Reallocation due to business stealing is estimated at a maximum of one third of the net employment created by product innovators. The growth of employment originated from the market expansion induced by the new products can be as important as another third.