This research provides empirical evidence on the employment effect of both process and product innovations under different market structures, using data from 1999 to 2009 on 11,369 manufacturing firms in Korea. Consistent to the literature, it first finds that the overall employment effect of innovations is positive, since process innovations do not have any significant effect but product innovations have positive and significant effects on employment. Then, our contribution is to estimate the employment effect of innovations in different market structure by adding interaction terms between proxies for market structure and each type of innovation. We find that process innovation has a greater negative effect in more monopolistic markets, and confirm no significant differences in the employment effect of product innovations across different market structure. Overall, we show that innovations have different effects on employment across different market structures, which implies that a competitive market is important for increasing employment through innovation.

Introduction

The impact of innovation on employment has long been a debated issue. While innovation is known to have a strong positive relationship with long term economic growth in general, the relationship between innovation and employment has not been clearly identified. This is because innovation has two distinctive effects on employment (Harrison et al., 2008; Vivarelli, 2014). On the one hand, innovation has a displacement effect, which displaces workers by capital, and has a negative influence on jobs. On the other hand, innovation has a compensation effect, which increases demand for workers in the production process. Thus, the overall employment effect of innovation cannot be predetermined. Given that economic theory does not ascribe an exact net effect of innovation, it has become a matter of empirical analyses. Empirical analysis has largely been conducted at the firm-level, and typically categorizes innovations as process innovations and product innovations (Entorf and Pohlmeier, 1990; Doms et al., 1995; Van Reenen, 1997; Klette and Førre, 1998, Piva and Vivarelli, 2005; Coad and Rao, 2008. In particular, Harrison et al. (2008, 2014) argue that distinguishing the innovation type facilitates understanding the employment effect of innovations, and that each type of innovation has a different purpose and can have different employment effects. Firms introduce process innovation for cost-saving, but introduce product innovation for demand expansion. Thus, the former is expected to have a negative influence on jobs and the latter, a positive influence (Harrison et al., 2008, 2014). While a large volume of literature verifies the above reasoning, fewer studies consider the impacts of innovation in different market structures, namely when markets are more or less competitive or close to oligopoly. This paper is an attempt to fill this gap and show how the impacts of innovation are determined differently by the type of market structure.