The Effect of R&D Growth on Employment and Self-Employment in Local Labour Markets

Abstract

The paper investigates the effects of firms' investment in Research and Development (R&D) on employment dynamics in the British local labour markets (Travel to Work Areas). We distinguish between local areas characterised by high and low routinisation of the workforce. We implement a robust instrumenting strategy to address endogeneity issues in the relation between innovation and employment. Our results suggest that increases in R&D investments mainly affect routinised areas, where the employment created is low skilled, concentrated in non-tradable sectors (like transport, construction) and services. A significant share of the jobs created is (unincorporated) self-employment, concentrated in the 25-34 age cohort. We qualify the effect of R&D on self-employment by looking at local firms' dynamics, which suggest that the increase in self-employment is reflected in a higher number of micro-firms. Rather, in non-routinized areas, R&D results in the expected increase in the demand of high-skilled workers and a reduced demand of low-skill employment.

Innovation and Self-Employment

“…In a prior contribution focused on the UK (Ciarli et al, 2018a), it is argued that an increase in self-employment might be related to firms' decision to invest in R&D. R&D investments are a broad proxy of innovation strategy, rather than performance, which is commonly measured by patents. R&D investments are composite in nature, including both capital and labour, and are also highly correlated with investments in other intangibles (Corrado et al, 2009(Corrado et al, , 2013, including human capital, and have therefore an effect on firms' hiring preferences, directly and indirectly (Ciarli et al, 2018a). Investing in R&D might also affect decisions to outsource non-core tasks that feed non-standard work.…”

“…The estimation of β and θ, the relation between R&D and job status as well as their interaction, might be biased due to various forms of endogeneity (omitted factors, reverse causality and measurement error). In order to avoid the endogeneity, building on Ciarli et al (2018a) and construct a shift-share instrument, whereby the change in R&D in TTWA a is instrumented with the initial (2001) composition of output across sectors in TTWAs, interacted with the nationwide change in industry R&D. More specifically, the initial output share of sectors in TTWA a is used to predict the change in R&D in a, multiplying the national R&D change (excluding TTWA a) by a's sector shares. In this way it is possible to isolate the change in R&D across TTWAs due to changes in nation-wide R&D dynamics from shocks in TTWA a that would be otherwise correlates with labour outcomes in that TTWA.…”

“…While the literature has mainly been focusing on the effects of technical change on employment, surprisingly quite a limited effort has been devoted on whether technological innovation affects the nature of work relationships and/or the employment composition towards alternative work arrangements and self-employment. Recent evidence in the US and the EU shows a surge in self-employment and alternative work arrangements that has been particularly dramatic over the past decade (Katz and Kreuger 2017a;Bell and Blanchflower, 2018;Ciarli et al, 2018a).…”

“…In a prior contribution (Ciarli et al, 2018a) the effects of R&D investments on employment and self-employment in the UK local labour markets (TTWAs) have been considered. The evidence thereby presented shows that self-employment is indeed an important component of the impact of innovation on labour markets.…”

“…The evidence thereby presented shows that self-employment is indeed an important component of the impact of innovation on labour markets. This paperbuilds on Ciarli et al, (2018a) and focuses on the relationship between innovation and self-employment. The paperanalyses occupational transition matrices of individuals working in TTWAs with different initial intensity of routinised jobs as related to changes in the R&D investments in the areas.…”