ABSTRACT
This chapter reviews selected studies examining the relationship between labour market policies, and innovation intensity and performance. It describes the empirical findings. The chapter discusses the data used for the estimation and presents stylized facts. It proposes simple empirical models to test the relationship between labour market policies and countries' innovation competitiveness. Trade competitiveness is measured by the natural logarithm of a country's exports value. Labour market policies vary from country to country. Employment protection policies are primarily introduced to protect workers from adverse labour market risks, such as lay-offs or low earnings. Murphy et al. identified two channels through which labour market policies may affect innovation. The first channel is linked through human capital investment. In this channel, labour market policy is likely to increase the probability of workers engaging in firm-specific or industry-specific skills. The second channel through which labour market policy may affect innovation is through firms' adjustment costs when they need to adjust against idiosyncratic shocks.
