For the rest of our lives: flexibility and innovation in Italy

This paper investigates the relationship between flexibility and innovation. We model a firm’s choice concerning: i) the mix of temporary and permanent workers; ii) the optimal level of training intensity by best-responding to the worker’s investments in skills. Then, we test our theoretical predictions using micro-data on Italian firms. In line with the expectations, we find that the relationship between flexibility and innovation has the form of an inverted U, suggesting that the innovation-enhancing combination of temporary and permanent workers exists and is unique. In addition, we analyze the mediating role of firm-sponsored training. Our findings suggest that numerical flexibility becomes detrimental to innovation when training intensity is low.