two-fold increase by age 25 and then remains unchanged after that, while in India average employment actually falls to one-fourth of its level at entry by age 35.<sup>44</sup> The steady growth of surviving enterprises in the US results in the bulk of employment being concentrated in larger, older (and more productive) plants, in contrast to Mexico and India, where employment is concentrated in smaller, young (and less productive) plants; since average wages are higher in larger plants (not only in the US but also in Mexico and India), this leads to fewer workers in Mexico and India benefiting from higher wages.<sup>45</sup> They show that low average employment growth in Mexico and India can largely be attributed to low TFP growth with age. They then show that resource misallocations that punish large plants can discourage investments that raise plant productivity (and job creation and wage growth).

It has long been recognized that innovation impacts employment through multiple channels of varying time scales and complexity, and that the overall effect is sensitive to the character of the innovation (process versus product, radical versus incremental, etc.) and its setting. Process innovation can lead to productivity gains which enable firms to produce the same level of output with fewer inputs, including direct labor-saving impacts or “displacement effects”. However, these direct negative effects of process innovation on employment can be counterbalanced by indirect expansion impacts or “compensation effects” when the cost reductions from the innovation spur price reductions to drive higher demand and greater output. Product innovation, on the other hand, generally leads to “market-expansion effects” when it stimulates domestic and foreign demand for the firm’s outputs, thereby enhancing labor demand for the innovating firm. However, both product and process innovation can cause demand diversion from substitute products of other firms, or “business-stealing effects”, and thereby have an uncertain impact on aggregate employment (depending on the relative strengths of market-expansion and business-stealing effects). How these countervailing impacts of innovation on employment balance in practice is an empirical question, depending on the nature of the technology employed, the substitutability of input factors, the own- and cross-price elasticities of demand, the degree of competition in the relevant product market, the nature of the business environment, the type of process innovation, the degree of novelty of the new product, and a host of other factors.<sup>46</sup>

> 44 These patterns hold across many industries and for formal and informal plants alike. Growth in average employment of a cohort is driven by survivor growth and/or by the exit of smaller plants. Hsieh and Klenow show that what appears to differ between US and India is the growth of incumbents: in the US, surviving plants experience substantial growth while in India incumbent plants become smaller with age.

45 Older plants in the US (more than 40 years old) account for almost 30% of total employment in the US, while they account for less than 10% of employment in Mexico and India; in contrast, less productive plants less than 10 years old account for 50% of employment in Mexico and India, while they account for roughly 20% of total employment in the US. Plants (informal and/or family-owned) that only employ unpaid workers account for 72% of employment in India in 1989-90, while the employment share of family plants has increased in Mexico from 10% in 1998 to almost 30% by 2008.

46 Using data on German manufacturing and service-sector firms from the third Community Innovation Surveys (CIS3) for the period 1998-2000, Peters (2005) finds that product innovations have a net positive impact on employment while process innovations are associated with employment reduction for manufacturing but not service firms. These findings are largely confirmed by Harrison et al. (2008) in a study that is also based on CIS3. Using comparable firm-level data across four European countries —France, Germany, Spain, UK— they find that process innovation has significant displacement effects that are partially counteracted by compensation mechanisms. The displacement effects of process innovation are most pronounced in manufacturing. On the other hand, product innovation is associated with employment growth and these results are similar across countries. Based on a firmlevel comparison across provinces and cities in China, Mairesse et al. (2009) find that the compensation effects of product innovation more than counterbalance the displacement effects of process innovation, the net result being 20