What is the Relationship between Knowledge Complexity and Income Inequality? A European Analysis

This paper studies the mutually reinforcing relationship between knowledge diversity, measured through complexity approaches implemented on patent data and national income inequality. Due to the policy relevance, and the context-specific nature of inequality dynamics, the paper focuses its analysis on European countries. By implementing a System of Equations (3SLS) model on a panel data of 30 countries across 18 years, the paper finds a mutually reinforcing relationship between the two dynamics: more complex nations are associated with more equal societies and more equal nations are correlated with a higher capacity of complex knowledge. While this is robust for different measurements of inequality, we find that inequality between the 50th and the 20th percentile increases as complexity increases but is not a deterrent for future complexity. As concepts of knowledge diversity impact innovation policy, this paper is influential in discussing inclusivity of the resulting economic growth