Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171088
Authors: 
Gray, Rowena
Montresor, Giulia
Wright, Greg C.
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6624
Abstract: 
The extent to which firms respond to labor supply shocks has important implications for local and national economies. We exploit firm-level panel data on product and process innovation activities in the United Kingdom and find that the large, low-skill labor supply (immigration) shock generated by the 2004 expansion of the European Union to Eastern European countries increased process innovation and reduced product innovation. This implies that the innovation response to labor supply shocks may be more nuanced than previous literature has suggested. Both of these effects are increasing in the low-skill intensity of firm production as well as firm size. In addition, the reduction in product innovation is lessened for firms whose output is sold locally. We interpret this last finding as evidence in favor of a demand side effect that mitigates the overall decline in product innovation generated by the labor supply shock. We present a model that illustrates the channels through which firms may respond to labor supply shocks, and find that our results are mostly consistent with the model’s predictions.
Subjects: 
product innovation
process innovation
immigration
labor supply shocks
JEL: 
J23
J61
F22
O31
O33
Document Type: 
Working Paper

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