Temporary hires and innovative investments

The flexicurity approach claims a positive effect of flexible labour on firm performance, also through an increased ability to innovate. Critics consider it a deregulation of the labour market, decreasing investment in human capital and innovation. We contribute to this broad debate providing an estimate of the relationships linking innovative investment, substitution investment, permanent hires and temporary hires. In particular, we aim at affirming or denying that innovative investments are accompanied by a specific kind of workforce, being it stable or flexible. In doing so, we contribute to bridge the gap among two quite separate strands of literature, as existing literature usually analyses capital and labour separately. Estimating a non linear recursive equation system we highlight a significant increase in the likelihood of hiring on a permanent base when the firm innovates; this holds till 2008. Afterward, during the crisis, innovating firms are more likely to hire using temporary contracts instead, a possible signal of a cost saving strategy adopted in a loose labour market. Furthermore, both permanent and temporary hires never depend on increases in labour costs; however, substitution investment increases when labour cost increases, maybe in an attempt to increase labour productivity through a more efficient capital equipment.