Technology, Nonlinearities and the Determinants of Inequality : New Panel Evidence

Relying on data for a panel of 90 advanced and emerging economies spanning the 1970-2015 period and System-GMM dynamic panel estimation, we extend the standard ‘Kuznets-curve' empirical framework to investigate how globalisation, financial sector development and technology influence changes in the distribution of income. We take account of potential nonlinearities for all the factors involved and distinguish two technological categories: General-Purpose Technology (GPT) and Investment-Specific Technology (IST). Our empirical findings highlight technological progress as playing a key role in determining inequality dynamics. In particular, we find strong evidence supporting the ‘Schumpeterian view' of the interplay between changes in income inequality and IST. This is characterised by a U-shaped pattern indicating that, beyond a certain threshold, IST worsens inequalities – in line with technology turning from labour-complementary to labour-replacing. The results are robust to the inclusion of additional socioeconomic and institutional quality variables in the models. In light of the growing automation process we are witnessing in recent years, these findings have significant implications for policy strategies aimed at reducing income inequality