Is Innovation Good or Bad for Employment? Recent evidence for Latin America

Microeconomics - Competition - Productivity

Innovation is widely considered to be a primary source of economic growth, and policies to encourage firm-level innovation are high in the agenda in most developed and successful catching-up economies. Many Latin American countries are increasingly investing in science, technology and innovation to promote economic growth and sustainable development. But innovation as such might not be sufficient to generate employment. And for countries that are facing labor market problems, persistent poverty and inequality, employment generation is probably the main route out of poverty and the most efficient way to reduce inequality, so the consequences of innovation for employment are of particular interest.

The relationship between innovation and employment is a complex one. Innovation could trigger direct (mainly firm level), partial and general equilibrium effects on employment, and across all these levels the relationship between these variables depends on many different transmission mechanisms, feedbacks and institutional factors (Pianta, 2006). Recent evidence on the firm level relationship between innovation and employment in developed economies indicates that whether and how innovation creates new jobs depends first and foremost on the type of innovation (Harrison, 2008). The introduction of new processes is generally driven by labor cost considerations and tends to reduce labor (i.e. displacement). At the same time, the introduction of new products or services may replace or add to the list of existing products or services with different effects on the generation of employment. In summary, the final results of innovation on employment will depend of the net outcome between displacement and compensation effects (Figure 1). In addition to this, the complexity of the relationship between innovation and employment also arises from the fact that innovation affects not only employment quantity but also quality. Certainly, innovation might change the skills mix of employment (Autor, 1998 and Bresnahan,, 2002).

Employment effects of innovation

The evidence on the relationship between innovation and employment is lacking for Latin America where the very idiosyncratic nature of innovation means that the above-mentioned findings cannot be simply extrapolated to this region. In order to fill this gap, in a recent paper we study the impact of innovation on employment in Latin America taking special attention to the role of product and process innovation on employment growth, its composition and whether different innovation behaviors by the firms have differential impacts. First, using data from innovation surveys in Argentina, Chile, Colombia and Uruguay, and based on the model put forward by Harrison et al. (1998), employment growth is related to process innovations and to the growth of sales separately due to new and unchanged products. Results show that compensation effects are pervasive and that the introduction of new products is associated with employment growth at the firm level. No evidence of displacement effects due to the introduction of product innovations was observed. Process innovation, on the other hand, accounts for a small share of the changes observed in employment, inducing small displacement effects. With respect to the impact of innovation on employment composition, there is a slight evidence of a skill bias because product innovation is more complementary to skilled than to unskilled labor (Table 1). Secondly, we relate employment to three types of innovation behaviors: make only (innovation developed internally by the firm), buy only (innovation purchased outside the firm, mostly from frontier countries) and make and buy (mixed strategy). Firms that conduct in-house innovation activities (“make only”) have the greatest impact on employment; the “make and buy” strategy comes in second. These results highlight the importance of fostering in-house technological efforts not only for innovation per se, but also to promote growth in firm employment. Finally, the study provides evidence on the mechanisms through which innovation strategies affect employment. The findings show that firm innovation behaviors affect employment through the differential impacts that they have on product and process innovation. Product innovation is mainly the result of in-house technology investments whereas process innovation is basically driven by “buy” strategies (Crespi and Zuniga, 2012).

Decomposition of Employment Growth

In summary our results suggest that overall innovation is good news for employment in Latin America and even in situations of aggregate employment destruction. However, our results also indicate that reaping its benefits requires the presence of a workforce with the requisite skills. Finally, we also found that enhancing firms’ internal capabilities to deploy innovation has a multiplier effect on employment which is higher than simply importing technology from abroad. We think that these findings overall points towards the importance of scaling-up innovation polices in the region but also towards the imperative of improving coordination between science, technology and innovation agencies and education ministries.


Autor, D., L. Katz, and A. Krueger. 1998. “Computing Inequality: Have Computers Changed the Labor Market?” Quarterly Journal of Economics, 113, 1169–1214.

Crespi, G. and P. Zuñiga. 2012. “Innovation Strategies and Employment in Latin American Firms.” Structural Change and Economic Dynamics, 24 (2013), 1-17.

Crespi, G. and E. Tacsir. 2012. “Effects of Innovation on Employment in Latin America”. IDB Technical Notes, No. IDB-TN-496. Washington, DC: IDB.

Harrison, R., J. Jaumandreu, J. Mairesse, and B. Peters. 2008. “Does Innovation Stimulate Employment? A Firm-Level Analysis Using Comparable Micro-Data from Four European Countries.” NBER Working Paper No. W14216. Cambridge, Mass: National Bureau for Economic Research.

Pianta, M. 2006. “Innovation and Employment.” In Fagerberg, J., Mowery, D. and Nelson, R.(eds.) The Oxford Handbook of Innovation. Oxford, United Kingdom: Oxford University Press.



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