Skills and social insurance: Evidence from the relative persistence of innovation during the financial crisis in Europe

We study private sector investments in innovation in the early days of the financial crisis (between mid 2008 and mid 2009), using a survey covering more than 5,000 firms across 21 European countries. Our interest is in how the stock of skilled labour affects the persistence of investment in innovation during a macroeconomic downturn. We infer differences in skill from national levels of participation in vocational education and training (VET) programmes interacted with levels of employment protection (EP) and unemployment insurance (RR). These forms of insurance should lead VET students to undertake training for skills which are more risky as human capital investments, but potentially more productive. We show that the strongest sustained investment in innovation is associated with a combination of high VET with either strong EP or strong RR. The result supports the view that the supply of skills makes an important contribution to innovation, and that social insurance can encourage socially beneficial risk-taking in educational choices.