Innovation, Inequality and the Skill Premium

Abstract

The relationship between innovation and inequality is analysed on a panel of 148 countries for a 50 year span, from 1963-2012. A non linear relationship is found that links innovation to inequality, and which appears to be rather different whether variables representing either input or output of innovative effort are considered. In both cases in fact there appears to be a threshold that once is overcame reverses the relationship. In particular, in the case of innovative inputs a positive relationship with inequality reverses once the threshold is crossed, while the opposite holds for innovative outputs, for which the relationship is initially negative to become positive as, for instance, the number of patents increases over a certain threshold. It is finally possible to exploit these different patterns, to provide a truly innovation-based analysis of the patterns of skill premium for US, France, Germany and Great Britain. In all these case, the ratio of R&D to Patents shows a robust negative relationship with the skill premium. In particular, when the ratio of R&D to Patents is low (implying a relatively high overall level of appropriability) increasing patterns of the skill premium result. The opposite happens when the ratio is high (implying a relatively low appropriability level), determining a decrease in the skill premium.