The Effect of Innovation on Skill Upgrading in Midtransition: Microeconometric Evidence from Estonia

Abstract

Technological change has affected skill upgrading extensively in many developed economies since 1970s. The evidence on the same relationship in catching-up economies is rather sparse, but confirms usually the relevance of technological change on skill demand. This chapter investigates the effect of innovation on skill augmenting in midtransition and tests whether this effect has been magnified by trade activities or by FDI. The paper uses microdata of third Estonian community innovation survey (CIS 3) merged with business register data. It is found that innovation has economically small and statistically insignificant effect on demand for tertiary-educated workers. Exporting to technologically advanced countries diffuses technology and increases demand for tertiary-educated workers, while foreign ownership weakens the effect of innovation on skills. These results indicate that there are presumably other more important factors determining skill demand in postcommunist CEE countries. Technological changes have presumably altered job tasks, but the effect on demand for tertiary-educated workers seems to have been weaker in the countries under transition than in developed high-income countries.