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Symposium 2015

Virtual Library File - Innovation, income inequality, and social mobility

The Challenge

“Inclusive Growth” refers to sustained economic growth while at the same time improving equal access to opportunities among (groups of) individuals and reducing income disparities (ADB 2011). It ...

“Inclusive Growth” refers to sustained economic growth while at the same time improving equal access to opportunities among (groups of) individuals and reducing income disparities (ADB 2011). It aims to provide different groups of a society with equal opportunities to participate in economic development processes, thus enhancing the living standards and promoting mobility across different social groups. A key driver of future development in the world is “innovation”.

This article addresses the dual role of innovation for raising the top income inequality but also for improving social mobility. On the one hand, new technological innovation increases top income inequality by allowing the innovator to increase his market competitiveness. And this allows the entrepreneur to reduce his demand for labor. Both contribute to increasing the entrepreneur’s share of income. In contrast, the analysis does not show that the overall income inequality (measured by Gini Index) is statistically significantly correlated with innovation. On the other hand, innovation, particularly those leading to creative destruction, enables new innovators to replace incumbent stakeholders, thus fostering social mobility. Such positive effects of innovation on social mobility cannot be really expected if governments focus on policies that foster innovation of incumbent stakeholders only and at the same time hinder the entrance of new innovators. Instead, inclusive growth may more possibly be encouraged by a policy package consisting of policies that foster innovation (e.g. tax policies) as well as adequate competition and entry policies.