IS LABOR-MARKET FLEXIBILITY HARMFUL TO INNOVATION

In a neoclassical framework one can argue that unemployment can be red uced by means of institutional changes that allow for a better working of the labour market and, notably, by achieving downward wage flexibi lity. I argue that although various policy recommendations about remov ing labour market rigidities are indeed advantageous in the short trun , they are detrimental from a Schumpeterian perspective, since they di scourage product and process innovation. Reduced innovation efforts wi ll in turn weaken the supply-side strength of an economy. The paper ex plores the implications of Schumpeter's notion of creative destruction and of Schmookler's hypothesis of demand-pulled innovations, borrowin g from recent empirical innovation research.