Economic complexity and income inequality: New evidence of a nonlinear effect

Abstract

AbstractIntroThe literature indicates that economic complexity (the geography of economic activities) is an important explanatory factor in income inequality; however, empirical evidence is still inconclusive. This study addresses this gap by considering the nonlinear influence of economic complexity on income inequality.MethodsPanel quantile regression with fixed effects is applied for a global sample of 121 countries from 1995 to 2018, showing robust findings.ResultsEconomic complexity appears to have an inverted‐U‐shaped effect on income inequality. That is, economic complexity likely increases income inequality up to a threshold, beyond which economic complexity helps to reduce income inequality. This inverted‐U‐shaped effect is found consistently in low‐income, lower‐middle‐income, and upper‐middle‐income countries, while the opposite effect is found in high‐income countries. Evidence of an inverted‐U‐shaped effect is also documented in most regions except the Middle East & North Africa and South Asia. Interestingly, the study finds that improvements in economic complexity appear to have U‐shaped effects on the income share of the bottom earners and inverted‐U‐shaped effects on the income share of the top earners.ConclusionThese effects explain the inverted‐U‐shaped effect of economic complexity on income inequality. The results are robust across different quantiles, proxies of income inequality, and various control variables