R&D Intensity and Income Inequality in the G7: 1870-2016

We examine how research and development (R&D) has contributed to income inequality in the Group of Seven (G7) countries from 1870 to 2016. Using newly developed panel data models that incorporate interactive fixed effects, we find that R&D is negatively associated with income inequality. Non-parametric models that allow us to capture the time-varying effect of R&D suggest that this average effect has been negative for most of this period. We find that legal origin moderates the relationship between R&D and income inequality and that the relationship is stronger for common law countries. We also examine three channels through which R&D could affect income inequality – economic growth, trade and employment – and find that economic growth and trade are mechanisms through which R&D transmits to income inequality. Of these two mediators, we find that the negative relationship between R&D and income inequality is mainly channelling through economic growth.