Labour Demand
Positive innovations

The rise in UK unemployment in the 1980s was widely attributed to a `gale of innovation' and many case-studies and simple correlations have found that new technologies entail labour shedding, while more sophisticated econometric models have identified their positive impact on employment. In Discussion Paper No. 874, John Van Reenen derives the expected effects of innovation for various union bargaining models. For `labour demand' models, in which wages are predetermined and employers unilaterally set employment, employment should rise if the elasticity of labour demand is greater than unity. Under `efficient bargaining', the result should depend on the `contract curve': a stronger union that attaches greater weight to employment vis-à-vis wages is more likely to take some of the rents from innovation as increased employment. In `general bargaining' models, in which wages are determined first and employment determined with wages as given, such a rise in employment is even more likely.

Van Reenen estimates these models on employment data for 154 firms during 1976-83 and a head-count measure of innovations from Sussex University's Science Policy Research Unit, which pinpoints the first firms to develop technologically significant, commercially successful products and processes. He finds that innovation raises employment by up to 13% in unionized firms over the long run, and this result is robust for all data sets and a wide variety of specifications. Labour demand models best describe the data for unionized firms, while efficiency wage models appear best to describe the non-unionized sector. Although generalizing from results drawn from a short period of severe recession is clearly hazardous, Van Reenen notes that those firms that emerged from the slump appear to have reduced employment on account of low demand or previous `over-manning' rather than technological innovations. New technologies may increase economy-wide unemployment in the long run, but spillover and survivor biases are more likely to lead to underestimates of their benefits; these results indicate that major innovations clearly tend to create jobs, especially in firms with strong unions.

Employment, Innovation and Union Bargaining Models: New Tests and Evidence from UK Manufacturing Firms
John Van Reenen

Discussion Paper No. 874, January 1994 (HR)