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Innovation contributes to income inequality, study suggests

Posted October 27, 2014
Picture: Vertical Limit. Image credit: Paul Bica via Flickr, CC BY 2.0.

Picture: Vertical Limit. Image credit: Paul Bica via Flickr, CC BY 2.0.

It is widely accepted that innovation is an important element of a successful economy. However, new study conducted by Canadian scientists shows that it has a dark side: it considerably contributes to the growth of wage inequality. “The analysis reveals that there is a positive relationship between innovation and inequality: cities with higher levels of innovation have more unequal distributions of earnings,” the researchers say.

Recent decades witnessed considerable increase of economic disparity. These processes touched many developed countries including Canada. Interestingly, previous research shows that income heterogeneity is predicted by the city size: the larger the city, the larger the inequality. How this finding can be accounted for? Somewhat surprisingly, it might be that this relationship is at least in part driven by innovation. When new technologies are introduced, demand for highly skilled specialists compared to low skilled workers increases. Qualified individuals can exploit technological advancements to increase their earnings. Meanwhile, less educated individuals watch how their salaries diminish.

However, there are only few empirical studies testing this hypothesis. Sébastien Breau and his colleagues at McGill University attempted to fix this shortcoming of previous research. “In this article, we set out to investigate the relationship between innovation and earnings inequality across metropolitan areas in Canada. The central question guiding the analysis is whether or not innovation is responsible, at least in part, for recent changes in the distribution of wages,” the economists explain. Analysis of longitudinal dataset demonstrates that level innovation can account for income differences. Urban areas, which are more innovative, are also more unequal. This conclusion remains even after controlling various socio-demographic, economic and institutional parameters of each city.

These findings raise very significant policy concerns. Negative effects of wage heterogeneity is well-documented. This implies that innovation is not necessarily promoting sustainable growth. “If the trend continues unabated, Canadian urban labor markets will only become more precarious, marked by a growing divide between the privileged few in the upper echelons of the income ladder (consisting mostly of professionals, managers, technology sector, and other highly skilled workers) and the mass of low-skilled, low-wage workers at the bottom,” the scholars claim.

Article: Breau, S., Kogler, D. F. and Bolton, K. C., 2014, On the Relationship between Innovation and Wage Inequality: New Evidence from Canadian Cities. Economic Geography, 90: 351–373, source link.

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