Journal of Banking & Finance
This paper examines the impact of changes in job security on corporate innovation in 20 non-U.S. OECD countries. Using a difference-in-differences approach, we provide firm-level evidence that the enhancement of labor protection has a negative impact on innovation. We then discuss possible channels and find that employee-friendly labor reforms induce inventor shirking and a distortion in labor flow. Further investigation reveals that the negative relation is more pronounced in (1) firms that heavily rely on external financing, (2) firms that have high R&D intensity, (3) manufacturing industries, and (4) civil-law countries. Our micro-level evidence indicates that enhanced employment protection impedes corporate innovation.
Francis, Bill B.; Kim, Incheol; Wang, Bin; and Zhang, Zhengyi, "Labor Law and Innovation Revisited" (2018). Finance Faculty Research and Publications. 131.
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