Innovation and Top Income Inequality

That the past decades have witnessed a sharp increase in top income inequality worldwide and particularly in developed countries is by now a widely acknowledged fact. However no consensus has been reached as to the main underlying factors behind this surge in top income inequality. In this paper several NBER researchers argue that, in a developed country like the U.S., innovation is certainly one such factor.

The researchers find:

– The top 1 percent’s income share in a given U.S. state in a given year is positively and significantly correlated with the state’s degree of innovativeness.
– When measured by the number of patents per capita, innovativeness accounts on average for around 17 percent of the total increase in the top 1 percent’s income share between 1975 and 2010.
– Innovativeness is less positively or even negatively correlated with measures of inequality which do not emphasize the very top incomes.
– Innovativeness is positively correlated with upward social mobility.
– Innovativeness drives social mobility mainly because of new businesses upsetting the status quo. Already existing firms, like Microsoft, are not the drivers of this social mobility effect.
– The social mobility effect is not as strong in states with strong lobbying interests.

Overall, the study links innovation to social mobility and income inequality, and it gives proof of a causal role of innovation. Preliminary work by the researchers also shows that this pattern is not isolated to the United States. Cross country patterns seem to support their claims.

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