Is Flexible Labor Good for Innovation? Evidence from Russian Firm-level Data

The level of innovation activity of the Russian enterprises is inferior to the level of innovation activity of enterprises in developed countries. At the same time, Russian enterprises actively use fixed-term contracts, which help them to reduce the labor costs and adapt to changes in demand, to increase the flexibility of labor and improve the selection of employees at the workplaces. Fixed-term contracts can contribute to innovation, because they enhance the flexibility of labor relations and create savings in the use of workers. However, fixed-term contracts can reduce the likelihood of innovation because they reduce investment in human capital, leading to a reduction in labor productivity. Which trends dominate in labor relations is the subject of this study. For the study we used data about enterprises from the annual Russian Enterprises Survey in 2014. The sample is representative for Russia and includes small, medium and large enterprises with more than 30 employees in seven sectors (mining, industry, construction, transport and communications, trade, finance, business services). For the analysis, we used bivariate probit model, Heckman correction model and probit model with continuous endogenous regressor (the share of workers with fixed-term labor contracts). The results showed that fixed-term contracts have a positive effect on the innovation activity of enterprises only when they are used in a limited quantity. With an increase in the percentage of workers with fixed-term contracts, the likelihood of innovation activity of enterprises declines.