Abstract
AbstractAn established tenet of the literature is that the use of flexible labor leads to less innovation. Yet, less attention has been paid to the possibility that it is the decision to innovate that generates the incentive to hire on a permanent basis. The goal of this paper is to show the existence of interlocking complementarities between the firm's technological and hiring strategies. To do so, we develop a simple model where the workers’ decision to invest in human capital is affected by the type of employment contract (temporaryversuspermanent) and by the type of technological investments (routineversusinnovative). When the firm is unable to coordinate its actions across these different domains, two equilibria simultaneously exist: in the ‘high-road’ equilibrium, firms invest more in innovative projects and hire on a permanent basis; in the ‘low-road’ equilibrium, they invest more in routine projects and hire on a temporary basis.
Highlights
The ongoing flexibilization of European labor markets has received extensive attention in the literature
Given the interlocking character of institutional complementarities, interventions in labor market institutions are ineffective unless they are coupled with the fine-tuning of innovation incentives
We have shown the existence of interlocking complementarities between the firms’ decision to innovate and its choice to hire on a permanent basis
Summary
The ongoing flexibilization of European labor markets has received extensive attention in the literature (see, e.g. Deakin et al, 2008; Eurofound, 2020; European Commission, 2010). The literature on the variety of capitalism (hereafter, VC) has shown that the intensity and the kind of innovation pursued by an economic system depends on the multiple complementarities defining a country’s institutional framework (Allen, 2013; Hall and Soskice, 2001) The intuition behind this argument is in line with early institutionalist contributions that place relative emphasis on the structural components of the so-called ‘national systems of innovation’ (Lundvall, 1992; Nelson, 1993; OECD, 1997). Since the extant literature has showed that the use of flexible labor is detrimental to all kinds of innovation (irrespectively of the distinction between process versus product or radical versus incremental), we develop a framework where a firm must decide whether to invest in ‘routinary’ projects that involve no innovative effort, or in ‘innovative’ activities that capture the broadest array of possible innovations.
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