European policy regards innovation as an engine for growth. Measures to encourage the development and diffusion of new technologies are seen as a suitable instrument to promote employment in Europe. This report studies the relationship between employment growth and innovation with a large sample of European firms. In particular, the report investigates how the relationship between innovation and employment changes in various phases of the business cycle in general and in particular for different types of firms depending on their technological intensity, business cycle sensitivity, size, ownership structure or geographical location. Understanding how this mechanism works at the firm-level is central for the design of innovation policy.