This study estimates the direct elasticity of employment with respect to innovation, starting from the specification of a production function in which the stock of knowledge capital raises relative productivity through the incorporation of innovations. The study also estimates the elasticities of demand with respect to prices and knowledge capital, starting from the specification of a demand relationship. The combination of these elasticities allows us to estimate "direct", "indirect" (via cost-price), and "total" effects of innovations on employment. The model is applied with micropanel data on an (unbalanced) sample of Spanish manufacturing firms, observed during the period 1990-95. Our estimates imply that a 1% increment in the stock of knowledge tends to displace 0.5% of labour, but also that the indirect effect leads to a final 0.6% increment of labour.