Muhammad Yorga Permana

Using a panel of 28 European Union countries for the period 2003–2014, the authors provide empirical evidence for the relationship between innovation, technological specialization, and income inequality. The results of the fixed effect panel regressions show two important findings. Firstly, the positive link was found between innovation, as measured by patenting activities, and income inequality as measured by Gini index and the top 10% income shares of the richest. Secondly, the authors also found the positive correlation between technological specialization, as measured by the Coefficient of Variances (CV) of Revealed Technological Advantage Index, and income inequality. Overall, the study enriches the previous literature suggesting that innovation may increase the gap of income distribution through the mechanism of Skill-Biased Technical Change (SBTC) and the Schumpeterian view of entrepreneurial rent. More importantly, this study is the first which found that not only the level of innovation does matter to the income distribution, but also how the innovation activities are specialized or diversified. Concentrating the activities into few narrow sectors (i.e., increase technological specialization) may also lead to the increase of income inequality.