How stronger labor laws can foster innovation

A new study suggests that laws that make it more complicated to fire or lay off employees are good for innovation.

Here's an interesting finding: A new working paper suggests that national labor laws that make it harder to dismiss employees have a positive effect on innovation -- and even  on economic growth. Researchers Viral Acharya, Ramin Baghai-Wadji, and Krishnamurthy V. Subramanian analyzed labor laws and U.S. patents and citations from five countries (the U.S., Germany, the U.K, France and India) over more than three decades. And, because several of the countries had changes to their labor laws during that period, the researchers were able to look at the effect of those changes on changes in innovation rates, too.

The authors report that they found evidence that strong labor laws in general foster innovation  but have a negative effect on economic growth. However one aspect of such laws -- more stringent  laws regulating employee dismissal  -- had a strong positive effect on both innovation and economic growth in a country.

Why would laws that make it more complicated for employers to let workers go have a positive effect on innovation? One reason, the authors suggest, is that such laws may make employees more willing to take the greater risks associated with attempting innovation.

3 Comments On: How stronger labor laws can foster innovation

  • Seguridad en el empleo e innovación « El Blog de José Manuel Castro | March 16, 2009

    […] innovación a nivel de empresa.” Párrafo que está literalmente copiado y traducido del estudio Labor Laws and Innovation , de los profesores Viral Acharya , Ramin Baghai-Wadji , y Krishnamurthy V. Subramanian y que […]

  • raptormgr | March 19, 2009

    I draw a different conclusion. To grow profits, you either grow revenue, or reduce expenses (or both). Cutting off the quick and easier path of employee reduction, forces management to dig down and find a way to grow the top line. Thus their leadership mantra becomes innovation.

  • » Blog Archive KiteTail: innovation management for growth | MITSloan: How stronger labor laws can foster innovation | March 20, 2009

    […] Sloan Management Review recently posted about a new working paper from Researchers Viral Acharya, Ramin Baghai-Wadji, and Krishnamurthy V. Subramani…. Their findings (based on their study of labor laws and patents and citations from the US, Germany, […]

Add a comment