The Impact of Research and Development on Job Creation

Since 2008, the labor participation rate in the United States has fallen from a high of 67.3% in 2000 to 62.6% today. In light of these figures, what role does research and development (R&D) have on employment – does it increase or decrease the labor market?

To begin with, long-term investment in R&D is a growth strategy, not just for a company, but also for the entire country. Essentially, American businesses of all sizes depend on research and development (R&D) to create new and better products and services that allow them to grow and meet the needs of their customers. Furthermore, for the United States to remain competitive in the global marketplace, an investment in R&D that keeps businesses growing, innovating, and hiring employees in the U.S is required.

However, rather than investing in new technologies, materials, and processes that can help a company grow in the long-term, many companies prioritize immediate profits instead. This can ultimately lead to companies cutting jobs, merging or outsourcing.

In contrast, there have been numerous research studies into how R&D investment helps develop new products and knowledge that drives growth, creates jobs, and improves the national welfare. For instance, a recent study by Huo (2015) revealed that each 1 percent increase in R&D expenditure in the United States raises its employment rate by 0.38 percent. Earlier research by Bogliacino and Vivarelli (2012) also found that R&D expenditure, which fundamentally fosters product innovation, has a job-creating effect.

Nonetheless, access to finance remains a key bottleneck for companies  that are undertaking research and development. As a result, majority of the governments around the world incentivise start-ups to undertake R&D activities through tax breaks. In the United States, the government offers a federal Research and Development (R&D) tax credit and this tax scheme can lead to serious savings on firm’s investments. In fact, 70 percent of credit dollars are actually used to pay the salaries of R&D workers in the U.S.

Moreover, in December 2015, the federal R&D tax credit was made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act). Apart from instilling confidence in US businesses to invest in R&D, the PATH Act included two new provisions that will make it easier for startups and small and medium-sized businesses to immediately benefit from the R&D tax credit.  A tax professional, such as Swanson Reed, with R&D tax credit expertise can assist businesses with qualifying for and claiming the credit. Contact us today to find out if your business could benefit from the R&D tax credit.

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