Technological change, rent and income inequalities: A Schumpeterian approach

Increasing levels of income inequality have recently attracted much attention. The literature has concentrated on the hypothesis that increasing levels of income inequality are the cause of slow growth and social unbalances. This paper contributes to exploring an alternative hypothesis according to which increasing levels of income inequality are the consequence, rather than the cause, of slow growth and more specifically of the slowing pace of technological change. The paper articulates the Schumpeterian hypothesis that the rate of technological change exerts a significant influence in reducing income distribution. Due to the powerful effects of creative destruction, the rate of technological change engenders a reduction in wealth and rent inequalities that are highly skewed and, consequently, limits income inequality. We test this hypothesis in an empirical exercise by implementing quantile regressions on a large dataset of advanced and industrializing economies. The inequality diminishing effect of technological change holds along the entire income inequality distribution, but exhibits larger effects in countries where the concentration of wealth and, consequently, income asymmetries are stronger. These results have novel welfare implications and suggest some crucial insights for economic policy analysis.