What “Causes” Income Inequality? Technological Innovation versus Financialization

Abstract In this study we ask whether technological innovation, financialization, or both are responsible for global increases in income inequality. To explore this question, we adopt a modeling and estimation approach that handles past econometric issues and provides causal estimates of shocks on income inequality. This new approach yields several results. First, in contrast with the prediction that technological innovation may increase income inequality, no connection between innovation and income inequality is found. Second, financialization, rather than financial development, is found to increase income inequality. Finally, increases in income inequality due to financialization appear to reflect represent increases in the income shares of top earners at the expense of middle earners rather than workers from the bottom half of the income distribution.