The good jobs-high innovation virtuous circle

Abstract

The existence of a virtuous circle between industries’ employment quality, their ability to introduce new products, increase labour productivity and pay higher wages is explored in this article, developing an alternative explanation to mainstream views on labour flexibility and lower wages as drivers of competitiveness. Building on a novel conceptual framework relying on evolutionary and institutional perspectives, we develop a simultaneous four-equation model that relates these four dimensions. The model is tested empirically for manufacturing and service industries of major European economies. We empirically identify mutually reinforcing relationships, where higher employment quality (with a lower presence of non-standard work) complements technological activities, leading to more product innovations that increase productivity growth. In turn, the latter allows wage increases that contribute to higher employment quality. These combined moves towards higher-quality labour and higher-quality capital are at the root of what we define as the good jobs-high innovation virtuous circle.