Abstract
We study the impact of employment protection legislation (EPL) on firms’ innovation choices, through an event-study analysis of several labor market reforms occurring in Europe over 2000-2016. Data on firms’ technology adoption from the Community Innovation Survey reveal that substantial drops in EPL for temporary workers prompt a reallocation of innovation efforts towards the introduction of new products, away from process innovation aimed at cutting labor costs. Among innovative firms, the share of product innovators increases by 15% of the pre-reform value (10pp in absolute terms), while the share of firms specializing in process innovation falls by 35% (also 10pp).
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