February 2007

IZA DP No. 2621: Innovation and Employment: A Survey

published in: Horst Hanusch and Andreas Pyka (eds.), Elgar Companion to Neo-Schumpeterian Economics, Cheltenham: Elgar, 2007, 719-32

According to the "compensation theory", market forces should assure a complete compensation of the initial labour-saving impact of process innovations. In this paper a critique of this approach is proposed through a detailed survey of the theoretical and empirical literature on the subject. The general conclusion is that – although compensation is always working – the complete counter-balancing of dismissed workers cannot be assumed ex-ante.