Research Reports Relationship Between Innovation and Income Inequality

Earlier this year the National Bureau of Economic Research (NBER)  released, “Innovation and Top Income Inequality,” a research paper that analyzes the connection between innovation, income inequality and social mobility. The researchers, who came from Harvard University, University of Pennsylvania, University of College London, INSEAD and Banque de France, gathered data across the U.S. from 1975-2010 using the number of patents held by each state as a measure for state innovativeness.

The findings from the report included:

  • “An increase in 1% in the number of patents per capita increases the top 1% income share by 0.17%.” Innovativeness always had a positive and significant effect on the top 1% income share.
  • In California between 1975 and 2009, “the increase in innovativeness can explain 22% of the increase in the top 1% income over that period. On average across US states, innovativeness as measured by the number of patents per capita explains about 17% of the total increase in the top 1% income share over the period between 1975 and 2010.”
  • When innovativeness increases, so does income inequality, but innovativeness is “less positively or even negatively correlated with measures of inequality which do not emphasize the very top incomes, in particular the top 2% to 10% income share (i.e. excluding the top 1%).”
  • “The lower the quintile to which parents belonged, the more positive and significant is the correlation between innovativeness and upward mobility.”

Overall, the “results show positive and significant correlations between innovativeness or frontier growth on the one hand, and top income shares or social mobility on the other hand.” The researchers conclude with questions that their findings raised, such as “how should we combine tax policy with other policy instruments (competition and entry policy, patent policy, R&D subsidies,…) to achieve more inclusive growth, i.e. reconcile the goals of enhancing innovation-based growth, enhancing social mobility, and avoiding excessive income inequality?”




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