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When Labor Regulations Foster Innovation

October 30, 2010 by and tagged ,

I love research that debunks commonly and unquestionably accepted stuff. Such is the case with French Econoblogger Olivier Bouba-Olga with a post on rigid regulations and innovation. According to common economic mantra, regulations are bad, rigidity is awful, hence we should have deregulation and flexibility, which will unleash the power of human innovation, unfettered. That is something accepted as religious dogma of neoliberalism, often-repeated and never examined. And because we operate in a cultural context where neoliberal ideas are given more truth-value than alternatives, we seem to accept such ideas more easily.

Not so fast, says Bouba-Olga, there is one major missing piece in the pro-flexibility argument: it assumes that social actors make plans without taking into account the institutional environment in which they plan on operating, only later to realize that there are regulations to follow, hence, they beautiful plans fail and they get discouraged and disenchanted (in the Weberian sense) or worse, they take said beautiful, innovative ideas and go someplace more flexible.

It is the wrong assumption, for Bouba-Olga. If actors have to function within a more heavily regulated environment, they are more likely to take that fact into account in the very design of their plans. They integrate the regulations from the get-go into their projects and behaviors. In other words, they do not adapt to regulations after the facts, but integrate them ex ante.

This is not just speculation on the part of Bouba-Olga, he mentions that this view is validated by a research paper on that very subject. Abstract:

“Stringent labor laws can provide firms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify this effect by exploiting the time-series variation generated by staggered country-level changes in dismissal laws. We find that within a country, innovation and economic growth are fostered by stringent laws governing dismissal of employees, especially in the more innovation-intensive sectors. Firm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act confirm the cross-country evidence.”

Emphasis mine.

Posted in Economy, Labor | 2 Comments »



2 Responses to “When Labor Regulations Foster Innovation”

  1.   JR Says:

    Necessity is the mother of invention, including the necessity of following laws or spurned on towards specific goals… how is this still hard?

    Reply

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