Can innovation improve income inequality? Evidence from panel data

• Published in: Economic systems Vol. 44; no. 4; p. 100815
• Main Authors: Law, Siong Hook, Naseem, N.A.M., Lau, Wei Theng, Trinugroho, Irwan
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.12.2020
• Subjects: CCEMG; Cross-sectional dependence; Income inequality; Innovation; Slope heterogeneity; CCEMG; Income inequality; Innovation; Slope heterogeneity; O3; O4; Cross-sectional dependence
• ISSN: 0939-3625; 1878-5433
• DOI: 10.1016/j.ecosys.2020.100815

•This study examines the effect of innovation on income inequality in developed countries from 1990 to 2015.•The methods use takes into account of heterogeneity and cross sectional dependence of macro panels.•Innovation is statistically significant in widening income inequality, but not in narrowing it.•Innovation increases income inequality through the moderation of globalization and financial development channels. Income inequality is a source of social instability and armed conflict, which in turn are detrimental to economic development. This study examines the role of innovation in income inequality in twenty-three developed countries, using a panel mean group estimator that takes cross-sectional dependence into consideration. Three income inequality indicators are used: the Standardized World Income Inequality Database (SWIID), the University of Texas Inequality Project (UTIP), and the Estimated Household Income Inequality (EHII). The innovation indicators are patent applications and patents granted. The empirical results based on the common correlated effect mean group (CCEMG) reveal that innovation widens income inequality. We also investigate whether the innovation–income inequality nexus is subject to a country’s level of globalization and financial development. The findings suggest that the interaction terms between innovation with these two variables have positive effects on income inequality, whereas innovation failed to reduce income inequality. Globalization and financial development are found to drive income inequality. The empirical results are robust to different income inequality and innovation measures as well as estimation techniques.