The evidence suggests innovation does contribute to the wealth of the one percent—but it also increases social mobility.

Innovation is the underlying driver of economic growth and rising living standards. But recently, high-tech startups and tech workers have been blamed for rising inequality and for pricing residents out of housing in leading tech hubs such as San Francisco. Last year’s protests over Google Buses shuttling employees from the city to its Silicon Valley campus while the rest of San Francisco’s public transportation system was underfunded is perhaps the perfect case in point. At the same time, economists have found that as inequality has risen over the past couple of decades, the rate of innovation has fallen, especially since the economic crisis.

Is innovation really to blame for rising inequality?

A June NBER study by a team of economists from Harvard, the University of Pennsylvania, and the University College London takes a close look at the connection between the two. Specifically, it examines the connection between innovation (measured by patenting) and the widening economic gap at the very top—between the one percent and everyone else—across states between 1975 and 2010. It also examines the relationship between innovation and more conventional types of inequality between the upper and lower classes.

Innovation and Top Income Inequality

Philippe Aghion, Ufuk Akcigit, Antonin Bergeaud, Richard Blundell, David Hémous

NBER Working Paper No. 21247

Issued in June 2015

NBER Program(s):   EFG   PE   PR 

In this paper we use cross-state panel data to show a positive and significant correlation between various measures of innovativeness and top income inequality in the United States over the past decades. Two distinct instrumentation strategies suggest that this correlation (partly) reflects a causality from innovativeness to top income inequality, and the effect is significant: for example, when measured by the number of patent per capita, innovativeness accounts on average across US states for around 17% of the total increase in the top 1% income share between 1975 and 2010. Yet, innovation does not appear to increase other measures of inequality which do not focus on top incomes. Next, we show that the positive effects of innovation on the top 1% income share are dampened in states with higher lobbying intensity. Finally, from cross-section regressions performed at the commuting zone (CZ) level, we find that: (i) innovativeness is positively correlated with upward social mobility; (ii) the positive correlation between innovativeness and social mobility, is driven mainly by entrant innovators and less so by incumbent innovators, and it is dampened in states with higher lobbying intensity. Overall, our findings vindicate the Schumpeterian view whereby the rise in top income shares is partly related to innovation-led growth, where innovation itself fosters social mobility at the top through creative destruction.