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.