Innovation and Employment Cyclicality: Evidence from U.S. States

Although there is agreement on the positive role of innovation in the economy in the long run, there is little evidence to show whether its impact on employment varies during the business cycle. In this paper, we use patent and R&D data as a measure of innovation and exploit US state variation to fill this gap in the literature. We find that, measured by patents or R&D expenditures, greater innovation amplifies the variation of employment over the business cycle. In other words, highly innovative states see larger employment gains during expansions, but also higher employment losses during downturns.