Innovation, on-the-job learning, and labor contracts: an organizational equilibria approach

Abstract

An established tenet of the literature is that the use of flexible labor leads to less innovation. Yet, less attention has been paid to the possibility that it is the decision to innovate that generates the incentive to hire on a permanent basis. The goal of this paper is to show the existence of interlocking complementarities between the firm's technological and hiring strategies. To do so, we develop a simple model where the workers’ decision to invest in human capital is affected by the type of employment contract (temporary versus permanent) and by the type of technological investments (routine versus innovative). When the firm is unable to coordinate its actions across these different domains, two equilibria simultaneously exist: in the ‘high-road’ equilibrium, firms invest more in innovative projects and hire on a permanent basis; in the ‘low-road’ equilibrium, they invest more in routine projects and hire on a temporary basis.

Shift in The Characteristics of Certain Fixed-Term Work Agreements in Employment Contracts Post The Omnibuslaw Was Implemented in Indonesia

“…The provision of compensation money does not apply to foreign workers employed by employers in employment relationships based on PKWT (Risfa Izzati, 2022). It is clear that there is a difference considering that in the previous regulations compensation for PKWT that had been completed within the time period was not regulated (Dughera et al, 2022). Compensation is given as a form of protection to workers because generally the dispute that arises from the end of the PKWT is whether the worker is entitled to severance pay or not.…”

“…The reform of manufacturing technology in Indonesia means that low-skilled labor can be replaced with various machines that can make the production process more effective and efficient (Dughera et al, 2022). However, with the supply of workers in Indonesia with junior high school education and below who are classified as low-skilled labor, 76.12% of the workforce is very vulnerable to the threat of disruption due to the adoption of technology in various fields (Harryarsa & Hamid, Supardi, 2023;Mezei, 2019) .…”

Labour market rigidity and firm innovation

“…The relationship between labour regulation and firm innovation has produced mixed results. Dughera et al (2021) find a positive relationship between deregulation and firm innovation, emphasising the incentive for firms to hire workers on a long‐term basis and the positive effects of innovative workers on efficiency. Bartelsman et al (2016) highlight the benefits of flexible hiring and firing for industrial upgrading and risk‐taking behaviour.…”

“…Existing empirical studies on labour market regulations' impact on firm innovation have produced mixed results (Bartelsman et al, 2016; Dughera et al, 2021; Griffith & Macartney, 2014; Hoxha & Kleinknecht, 2020; Smirnykh, 2016). The underlying mechanism remains unclear, with studies considering factors such as uncertainty in worker training investment and flexible recruitment related to moral hazard and non‐contractible cases.…”