Income Inequality and Economic Complexity Nexus: The Moderating Roles of Institutional Quality and Globalization

Abstract This paper investigates the link between economic complexity and income inequality by addressing the moderating functions of institutional quality and globalization on economic complexity. The dataset spans the G7 nations throughout the years 1995–2020. Parameter estimations draw on Panel Corrected Standard Errors (PCSE). Two models explore disparity in income distribution. The first model addresses personal income inequality, second labor income share. Economic complexity, institutional quality, globalization, economic growth, and human capital are independent factors in both models. The results show that when moderating effects are not taken into account, economic complexity increases income inequality and decreases labor income share. Conversely, institutional quality reduces personal income inequality and increases labor income share. When we consider the moderating roles of institutional quality and globalization; the higher institutional quality reduces the negative effects of economic complexity on personal income inequality as well as labor income share. This result shows that the moderating effect of institutional quality helps economic complexity to distribute income relatively more fairly. On the other hand, when the moderating effect of globalization is taken into account, it reveals that increasing globalization strengthens the negative effect of economic complexity on labor income share and reduces its effect on personal income inequality. In other words, although globalization provides a more equitable distribution among individuals, it does so at the expense of reducing labor income share.