Journal
EUROPEAN ECONOMIC REVIEW
Volume 46, Issue 2, Pages 375-395Publisher
ELSEVIER
DOI: 10.1016/S0014-2921(01)00093-9
Keywords
employment protection; innovation; R&D; international product cycle; labour market flexibility
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We develop a model to analyze the implications of firing costs on incentives for R&D and international specialization. The key idea is that countries with a rigid labor market will tend to produce relatively secure goods, at a late stage of their product life cycle. Consequently, their researchers tend to specialize in 'secondary innovation' which improves existing products, rather than 'primary innovation' which introduces new products. This is roughly consistent with the observed pattern of R&D in Europe versus the U.S. Employment protection does not necessarily harm the country where it prevails, but typically reduces world welfare and the world number of goods. (C) 2002 Elsevier Science B.V. All rights reserved.
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