Skills shortage and innovation

Skilled labour is a key input to the innovation process. A shortage in supply may impede innovation activities and result in lower productivity gains. While governments are concerned about these likely negative impacts, there is only limited empirical evidence whether and to what extent skills shortage affects innovation activities. The paper addresses this question using panel data from two waves of the German innovation survey. We measure skills shortage by job openings that could not be filled at all, not with the required skills or only with significant delay, distinguishing different skill levels. We analyse whether skills shortage is linked to stopping or abandoning innovation projects. Endogeneity issues are tackled by instrumental variable estimation techniques. Our results show that innovative firms are more likely to be subject to skills shortage, whereas skills shortage induces the cancellation of innovation projects.