WPS3273

# **Boosting Productivity via Innovation and Adoption of New Technologies: Any Role for Labor Market Institutions?**

## **Stefano Scarpetta and Thierry Tressel**<sup>*****</sup>

World Bank, Human Development Network, and IMF <u>sscarpetta@worldbank.org; thierry.tressel@imf.org</u> Tel +1 202 458 1119, Fax +1 202 522 7247

## _Abstract:_

_This paper presents empirical evidence on the determinants of industry-level multifactor productivity growth. We focus on “traditional factors”, including the process of technological catch up, human capital and R&D as well as institutional factors affecting labor adjustment costs. The analysis is based on harmonized data for 17 manufacturing industries in 18 OECD economies over the past two decades. The disaggregated analysis reveals that the process of technological convergence takes place mainly in low-tech industries, while in hightech industries, country leaders tend to pull ahead of the others. The link between R&D activity and productivity also depends on technological characteristics of the industries: while there is no evidence of R&D boosting productivity in low-tech industries, the effect is strong in high-tech industries, but the technology leaders tend to enjoy higher returns on R&D expenditure compared with followers. There is also evidence in the data that high labor adjustment costs (proxied by the strictness of employment protection legislation) can have a strong negative impact on productivity. In particular, when institutional settings do not allow wages or internal training to offset high hiring and firing costs, the latter reduce incentives for innovation and adoption of new technologies, and lead to lower productivity performance. Albeit drawn from the experience of industrial countries, this result may have relevant implications for many developing economies characterized by low relative wage flexibility and high labor adjustment costs._

**_Key words_** _:_ productivity, convergence, employment protection, industrial relations, panel data

**_JEL codes_** _:_ L51, O33, C23, J32

## World Bank Policy Research Working Paper 3273, April 2004

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._

> * . Corresponding author: Stefano Scarpetta. The authors wish to thank Andrea Bassanini, Carlos Cavalcanti, Jørgen Elmeskov, Mike Feiner, Daniel Lederman, Gilles Saint-Paul and Ignazio Visco, as well as the participants to the 2003 World Bank _Economists’ Forum_ for useful comments on a previous draft of the paper. The views expressed in this paper are those of the authors and should not be held to represent those of the World Bank or the IMF.

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