Innovation and job creation in a dual labor market: evidence from Spain

This paper studies the effect of product and process innovations on job creation in the Spanish manufacturing sector over the period 1991–2005. We use a change in the employment protection legislation (EPL) in 1997 to study the effect of innovations on permanent and temporary workers before and after that change. We find that (i) product and process innovation created jobs, (ii) before the change in the EPL in 1997 innovations did not affect the number of permanent workers and all the increase in employment was explained by the increase in the number of temporary workers, (iii) after the change in the EPL, innovations increased both the number of temporary and permanent employees, and (iv) while the increase in temporary workers takes place after one year of the innovations, the increase in permanent workers occurs mainly two years after the innovations.