INNOVATION POLICY INSTRUMENTS

Concluding remarks on international trade issues:
• Allow import competition from non-members countries to enhance the
competition, in order for the member countries to specialize in more
advanced production
• Stimulate regional milieu with rich import and export networks
5.6 The Labour Market
Labour market policies are normally not aimed at influencing innovations but may nevertheless
have important consequences for firms’ innovative strategies. Labour market policies affect the
firms’ capacity to appropriate the gains from innovation activity since these policies affect the
cost of implementing innovations. The relationship between job protection and innovation is not
straightforward. The impact of job regulation depends on the system of industrial relations, and
the unique characteristics of each industry (Bassanini and Ekkehard, 2002).
Labour market flexibility contributes to innovation, since such flexibility facilitates the
introduction and implementation of new production methods. The labour market flexibility
increases, if workers can be easily (re-)assigned to different tasks, and if workers can easily
change jobs. Investment in human capital through general on-the-job-training allows employees
to adjust to changing circumstances more easily. On-the-job-training can also be firm-specific
and in this case the employees are not better prepared for a changing environment.
Measures to combat income inequality distort the performance of the labour market, because
workers become less willing to adapt to the dynamics of the labour market. Policy measures,
such as long and generous unemployment, disability, and sick benefit payments induce workers,
who loose their jobs to stay out of the labour market permanently, and to let their labour skills
and their human capital whither away and thus creating hysteresis.
However, labour market flexibility is important for innovation but flexibility is accompanied by
greater inequality and uncertainty. Currently, in particular within EU-15, income inequality is
kept within rather limited bounds, and risks are insured mainly through public arrangements.
Government intervention to reduce or compensate for inequality, and uncertainty can to a certain
degree be motivated by general welfare arguments, but it can easily turn into government failure,
as it distorts the functioning of the labour markets, and reduces the incentives to accumulate
human capital. Only by increasing the effectiveness of government intervention, i.e. by avoiding
institutional failure, can the labour market flexibility be increased without sacrificing the income
protection of workers.
Labour market flexibility includes aspects, such as security of employment, and variation of
working hours. Security of employment diminishes the flexibility in the labour market, and can
therefore harm the innovation capability of a firm. On the other hand, when the employees feel
secure, they are willing to take more risk in their job, which can result in more innovations.
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