Labour market rigidity and firm innovation

Abstract

This paper examines the impact of pro‐worker interference on wage contracts and innovation incentives in the labour market. Using a general equilibrium model, we find that excessive interference affects contingent wage contracts in innovator start‐ups and tech‐intensive firms, especially for complex innovation. When worker dismissal is restricted, high wages may not effectively drive innovation. Moreover, without an efficient intellectual property market, excessive labour market interference can lead to innovation stagnation. Our findings highlight the importance of balancing labour market regulations to foster innovation and ensure its continued growth.