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Do Labor Market Regulations Affect the Link between Innovation and Employment? Evidence from Latin America

  • Laura Baensch , Maria Laura Lanzalot , Giulia Lotti and Rodolfo Stucchi EMAIL logo


This paper sheds light on how labor market regulations affect the relationship between different types of innovation and employment in Latin America. We estimate the effect of process and product innovation on employment growth using Enterprise Surveys for 14 Latin American countries. We calculate the model for the whole sample and then classify countries according to the rigidness of their labor market regulations. We find that: (i) product innovations have a positive impact on employment growth; (ii) process innovations do not affect employment growth; and (iii) more rigid labor market regulations (minimum wages and severance payments) reduce the effects of innovation.

JEL Classification: D2; J21; J38; L60; O31


A Additional Robustness Checks

Table 5:

Robustness check – additional instruments.

AllHigh MWELow MWEHigh SPLow SP
(B) Instrumental variables (Instruments: innovation support & R&D)
H0: β = 1 (p-value)0.5980.7100.6020.5180.820
Sargan test0.03840.03841.4780.03470.00543
Sector & country FEYesYesYesYesYes
  1. Notes: SE clustered by country-sector in parentheses; * p < 0.1, ** p < 0.05, and *** p < 0.01. Controls: age, age2, ln(employment beginning) & foreign.

Table 6:

Robustness check: minimum wage effectiveness based on median wages.

MWE highMWE low
(B) Instrumental variables (Instrument: innovation support)
H0: β = 1 (p-value)0.5070.951
Sector & country FEYesYes
  1. Notes: SE clustered by country-sector in parentheses; * p < 0.1, ** p < 0.05, and *** p < 0.01.

  2. Controls: age, age2, ln(employment beginning) & foreign.


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We thank Marisol Rodriguez Chatruc, Lucas Figal Garone, and the participants at the 23th LACEA Meeting for useful comments. The usual disclaimers apply. The views expressed in this paper are those of the authors and do not represent those of the InterAmerican Development Bank or IDB Invest, their Board of Executive Directors or the countries they represent.

Published Online: 2019-05-24

© 2019 Walter de Gruyter GmbH, Berlin/Boston

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