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INCOME INEQUALITY IN THE KNOWLEDGE ECONOMY

Cristiano Antonelli ConceptualizationMethodologyWriting ,

Matteo Tubiana ConceptualizationMethodologyFormal AnalysisData CurationWriting

PII: S0954-349X(20)30374-X
DOI: https://doi.org/10.1016/j.strueco.2020.07.003
Reference: STRECO 948

To appear in: Structural Change and Economic Dynamics

Received date: 22 July 2019

Revised date: 3 June 2020
Accepted date: 28 July 2020

Please cite this article as: Cristiano Antonelli ConceptualizationMethodologyWriting ,

Matteo Tubiana ConceptualizationMethodologyFormal AnalysisData CurationWriting , INCOME IN-
EQUALITY IN THE KNOWLEDGE ECONOMY, Structural Change and Economic Dynamics (2020),
doi: https://doi.org/10.1016/j.strueco.2020.07.003

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HIGHLIGHTS
 ICTs diffusion and new knowledge markets inaugurate the new knowledge
tradability;
 Globalization stirs advanced economies to a knowledge-intensive structural
change;
 Knowledge workers’ wages are protected from world competition and partake
to knowledge rents;
 Standard labour suffers factors prices competition and is increasingly de-
unionized;
 Robust correlation between KIBS and within income inequality in advanced
countries.

1
INCOME INEQUALITY IN THE KNOWLEDGE ECONOMY1

Cristiano Antonelli a, b,
Matteo Tubiana a, c
a
Dipartimento di Economia e Statistica Cognetti de Martiis, Università di Torino,
Lungo Dora Siena 100/A, 10153, Torino, Italy.
b
Collegio Carlo Alberto. Piazza Vincenzo Arbarello, 8, 10122 Torino, Italy.
c
Dipartimento di Scienze Aziendali, Economiche e Metodi Quantitativi, Università di
Bergamo. Via dei Caniana, 2, 24127 Bergamo, Italy.
Emails: cristiano.antonelli@unito.it; matteo.tubiana@unibg.it.

ABSTRACT. Advanced economies are characterised by the parallel

increase of income inequality and of the role of knowledge intensive
activities that substitute the manufacturing industry at the core of the
system. Radical changes in the organisation of the generation,
appropriation and exploitation of technological knowledge increase the
levels of knowledge rents. The shift to the knowledge economy triggers
the polarisation of labour markets between creative workers, able to
participate into the rents associated with knowledge exploitation, and
standard labour, exposed to the fall of employment in progressively de-
unionised manufacturing industries. The theoretical framework introduced
associates such knowledge-intensive structural change to the rising levels
of income inequality. The empirical section provides support for this
correlation estimating on the evidence of 20 OECD countries from 1990 to
2016 a negative sign for within income inequality regressed on the quota
of KIBS and R&D investments.

JEL classification: P10, D24, O33

Keywords: Knowledge tradability; Knowledge appropriability;

Knowledge-intensive business services; Trade-union bargaining power;
Unemployment; Wealth inequality; Rent inequality; Income inequality.

1
The funding of the research project PRIN 20177J2LS9 is acknowledged.

2
1. INTRODUCTION
The historical analysis of the distribution of income shows a clear
discontinuity in the long-term evolution at the end of the XX century. The
long-term reduction of income inequality levelled off in most advanced
countries in the last decades of the XX century. Since the beginning of the
XXI century, there is abundant evidence of the beginning of a new trend
towards increasing levels of inequality (Atkinson, Piketty, Saez, 2011).

The new trend towards increasing levels of income inequality parallels the
introduction and diffusion of new information and communication
technologies (ICT) and the globalisation of both product and financial
markets. This trend shapes the shift of advanced economies away from the
manufacturing industry as the pillar of their economic structure and the
emergence of knowledge-intensive business services (KIBS) as the new
key sectors (Atkinson and Piketty, 2007 and 2009; Piketty, 2014; Franzini
and Pianta, 2016).

This paper provides a theory of the relations among these three dynamics –
namely inequality, globalisation and knowledge economy transition – and
lays down a first empirical attempt to measure it. It articulates the
hypothesis that the new tradability of knowledge as an economic good that
can be exchanged as a service, capitalised in financial assets and intangible
property rights, rather than embodied in other tangible goods, together
with the radical structural change of the economic system towards a
knowledge economy are the cause of the increasing levels of income
inequality experienced by advanced countries.

We propose that the transition to the knowledge economy is based upon

the increased levels of knowledge appropriability made possible by the use
of ICT and the new organisation of the production and exploitation of
knowledge. In the knowledge economy, where knowledge is at the same
time the key input and output, income inequality is increased by the high
levels of knowledge rents and by the polarisation of labour markets with
the separation of creative workers, able to defend their wages at the pre-
globalisation levels and to participate into the rent associated with the
exploitation of knowledge, from standard labour, exposed to the decline of
the manufacturing industry and the fall of its employment (Autor, 2020;
Ravaillon, 2018; Wessel, 2013; Crouch, 2019).

3
The shift to the knowledge economy can be regarded as a radical change in
the economic structure of advanced countries. Following the way paved by
Kuznets (1955), radical changes in the economic structure of economic
systems are likely to affect income inequality with an inverted-U shape.
Income inequality raises when the change in the structure of the system is
radical and slows down eventually (Antonelli, 2019).

The new understanding of the central role of knowledge made possible by

the new growth theory pushes to apply the recent advances of the
economics of knowledge to try and understand the dynamics of income
distribution that parallels the economic growth of advanced economies
since their shift towards the knowledge economy (Aghion, Caroli, Garcia-
Penalosa, 1999).

The current changes in the organisation of the generation and exploitation

of knowledge, and the increased levels of knowledge appropriability and
tradability, instead, risk augmenting pre-existing wealth and rent
inequalities and worsening labour remuneration selectively. The remaining
of the paper will provide a more in-depth treatment of these arguments,
exploiting the inheritance of the economics of knowledge extensively. In
particular, Section 2 analyses the determinants and the effects of the new
knowledge tradability. Section 3 presents an econometric analysis with
OECD country-level data, illustrating the correlation between the
phenomena at play. The conclusions summarise the results of the analysis.

2. THE NEW MECHANISMS OF KNOWLEDGE APPROPRIATION,

TRADABILITY AND EXPLOITATION

2.1 The new mechanisms of new knowledge appropriation, tradability and

exploitation
The limited appropriability of knowledge and the intrinsic information
asymmetries that take place in its market exchange have traditionally
curbed the viability of the markets for disembodied knowledge. In such
markets, the prospective customer bears high levels of ex-ante risk. The
vendor may try and sell a lemon. For the transaction to take place, it is
consequently necessary that the vendor reveals all the details of the piece
of knowledge to the vendor who needs to assess its actual content before

4
the transaction takes place. The risk, however, shifts from the customer to
the vendor as soon as the details of the piece of knowledge are shared. The
customer, who was – ex-ante – exposed to the opportunistic conduct of the
prospective vendor, may – ex-post – implement an opportunistic
behaviour, leave the knowledge marketplace and take advantage of the
information disclosure without any payment. Now the risk has fully shifted
to the vendor. The Chandlerian corporation, based upon the separation
between ownership and control and the vertical integration of knowledge
generation intra-muros enabled to handle the problems of the limited
appropriability and tradability of knowledge (Lazonick, 2010).

The use of the wide range of ICT and the strengthening of IPRs have
changed in depth the mechanisms of generation, appropriation,
exploitation and market exchange of knowledge as a property right in the
new markets for patents, as service in internal quasi-markets as well as in
arm‟s length transactions, and capitalised as an asset traded in financial
markets. Let us analyse them in turn.

The new IPR regime. The enforcement in March 1994 of the Agreement of
Trade-related Aspects of Intellectual Property Rights (TRIPs Agreement)
and the sequence of patent reforms in the USA led to the strengthening of
the IPRs regime and their globalisation (Pagano and Rossi, 2009). The
enhanced privatisation of knowledge with the strengthening of the IPR
regime can be regarded as one of the main institutional changes that
characterise and favour the emergence of the new knowledge economy.
Many have compared the current trends towards the reinforcement and
extension of IPR to the enclosure of common land that preceded and
actually enabled the Industrial Revolution. The enhanced privatisation of
knowledge is clearly necessary to support the new tradability of
knowledge as a service. The strengthening of the IPR, in fact, reduces the
risks of opportunistic behaviour associated with the information
asymmetry in knowledge exchange and supports the specialisation of firms
in the generation and market exchange of knowledge as a service, rather
than an input embodied in other goods (Gallini, 2002; Pagano, 2014;
Aghion, Howitt, Prantl, 2015).
The new IPR regime supports the growth of the new markets for
knowledge. Next to the trade of knowledge as a service, knowledge is
traded as a patent and a license (De Rassenfosse, Palangkaraya, Webster,

5
2016). The trade as IPRs is actually complementary to the trade of
knowledge as a service, since the exchange of property rights is
implemented by the provision of dedicated services that enable customers
to take advantage of the proprietary knowledge that is acquired. In
traditional IPRs markets, transactions took place mainly across borders
between corporations active on the supply side, and foreign manufacturing
firms on the demand side (Arora, Fosfuri and Gambardella, 2001;
Branstetter, Fisman, and Foley 2006). In the new larger and denser
markets for IPRs, transactions take place to a more significant extent
within national borders between scientific entrepreneurship and small
knowledge-intensive firms active on the supply side and corporations on
the demand side (De Marco, Scellato, Ughetto, Caviggioli, 2017;
Caviggioli and Ughetto, 2013; Monk, 2009).

In the new markets for proprietary knowledge, transactions based upon

patents are more and more complemented by knowledge interactions
whereby knowledge producers provide knowledge users not only with a
licence but also with direct assistance. Such assistance enables to
implement the actual and effective transfer of proprietary knowledge and,
at the same time, provides vendors with the tools to keep under control its
applications and eventual uses to generate additional knowledge.
Licencing agreements are part of more extensive and articulated contracts
that combine knowledge interactions and knowledge transactions and
make possible for both parties to participate in the advantages of user-
producer interactions. Customers can better access and use the licenced
proprietary knowledge while vendors can take advantage of the learning
processes that take place in the after-sale experience. Here, ICTs provide
an array of new mechanisms based upon dedicated procedures and
protocols that enable the selective access to specialised and proprietary
databases so as to share the irreducible components of tacit knowledge and
make the knowledge interaction more effective and yet possible. Digital
trade of knowledge enables to increase its appropriation.

Venture capitalism and knowledge intensive assets. Knowledge is more

and more traded through financial markets where knowledge is capitalised
as a financial asset. On this regard, venture capitalism has been a major
institutional innovation. It combines, in fact, the advantages of the
Schumpeterian “innovative banker” with the merits of the corporation

6
while avoiding their respective shortcomings. Venture capitalists, like the
innovative banker, perform the screening of new projects well beyond the
limits of the internal competence of the incumbents, accessing the broad
spectrum of professional and scientific competencies available in the
marketplace. Like the corporation, it is able to mobilise competent
managers to assist in the development of the start-up. Like the corporation,
it can raise equity to fund innovations and actually participate not only in
failures – as it is the case of the banker – but also to successes. The take-
over of successful start-ups after their IPO in the stock markets becomes a
significant source of new knowledge. After the take-over, the new small
high-tech companies are delisted and become part of the corporation that,
in so doing, acquires advanced technological competence and effective
prototypes, well screened and tested with respect to both the engineering
and the marketing side. The take-over of small high-tech firms substitutes
intra-muros R&D activities within corporations. Most importantly, for the
focus of this paper, it enables venture capitalists, including scientific
entrepreneurs, to appropriate the economic value of knowledge, capitalised
as an asset. The exploitation of knowledge capitalised as equity takes
place in the stock markets that perform the new function of markets for
knowledge embodied in knowledge intensive assets (Kortum and Lerner,
2000; Gompers and Lerner, 2004).

Internal knowledge markets. The manufacturing corporations of advanced

countries became progressively global with an aggressive reorganisation
of the production process within global value chains (Amador and Cabral,
2016). Manufacturing activities were outsourced and delocalised in
industrialising countries. Knowledge intensive activities were retained in
their domestic locations. The internal division of labour within global
value chains led to the reduction of manufacturing activities in advanced
countries and the specialisation of headquarters in the production of KIBS
for the rest of the corporation. The exploitation of technological
knowledge generated nearby headquarters took place within internal
intermediary markets. Here, downstream users could access the proprietary
knowledge by means of transfer mechanisms among related parties based
upon internal licensing agreement, which would integrate both affiliates
and third parties associated in outsourcing activities to the value chain.
The globalisation of the corporation had direct effects on the composition

7
of employment retained within headquarters that became knowledge
intensive service providers.

Knowledge as a service. Knowledge is more and more sold as a service. In

the new markets for knowledge as an intermediary input, customers do not
purchase knowledge: they purchase the problem-solving capability of
specialised knowledge-intensive agents, who can stock their knowledge
and use it as an input in the generation of new idiosyncratic technological
knowledge, strictly dedicated to the need and requirements of the
customers (Goldfarb, Greenstein, Tucker, 2015). Digital technologies
support the systematic search of existing knowledge, its active inclusion as
an input in a recombinant knowledge generation process and its dedicated
application to the specific needs of customers. The interactive use of large
databases and broadband-based communication procedures such as
Artificial Intelligence, Internet of Things, Big Data and Cloud Computing
allows the effective organisation of research platforms into which several
specialised suppliers and customers can interact and exchange knowledge.
The digital infrastructure enables to apply the mechanisms and the
foundations of professional activities, traditionally practised in the
provision of personal services in final markets, to new intermediary
knowledge markets. In the new intermediary markets, the derived demand
for knowledge of large manufacturing firms matches the supply provided
by small service firms and scientific entrepreneurship specialised in the
generation and market exchange of specific types of technological
knowledge traditionally integrated within the corporation (Bauer, Latzer,
2016). The introduction of ICTs enables to reduce knowledge costs in
small, specialised service firms below corporate levels. Small and highly
specialised knowledge generation units, both private and public, enter the
new intermediary markets for knowledge, as they are able to generate new
knowledge at much lower costs than the large research departments of
corporations. At the same time, ICTs exploitation increases the size of the
international markets for selective knowledge-intensive services into
which small and specialised firms can enter (Freund and Weinhold, 2002;
Choi, 2010). A large part of the new trade of knowledge as a service is
typically based upon repeated and intense user-producer interactions that
enable the parties to specify their needs and apply their competence,
respectively. Within KIBS, the generation and exploitation of knowledge
are strongly associated via the enhanced levels of cumulability and

8
extensibility that, in turn, increase the levels of appropriability. The new
dedicated and idiosyncratic knowledge, generated on purpose for a specific
customer, enters and remains in the stock of internal knowledge of
suppliers and becomes an additional input for its eventual recombinant
generation and sale embodied in new knowledge services to other
customers. Customers have not access to the stock of knowledge, whereas
the providers retain the full command of the knowledge outputs and of the
procedures and methodologies that enabled them to elaborate specific
applications and solutions to the problems of the customers. Customers
can purchase the applications of the “algorithms”, not the “algorithms”
themselves. Appropriability is endogenous to both the generation and the
trade of knowledge as a service (Gans and Stern, 2017). Vendors can
appropriate large knowledge rents because they can take advantage of the
dynamic increasing returns triggered by the limited exhaustibility of
knowledge. The profitability of KIBS increases as they can keep selling
specific knowledge and yet increasing their stocks of generic knowledge.

2.2 The effects of the new mechanisms of knowledge tradability,

appropriation and exploitation
The new tradability of knowledge increases the layers of the knowledge
value chain and changes its organisation. It is no longer vertically
integrated within the corporation, but it is stretched by the upstream entry
of new specialised knowledge-intensive suppliers that sell, in new
intermediary markets, knowledge as a service, supported by tightened IPR
to downstream corporations. In turns, corporations use this knowledge to
manage their organisation and to feed the introduction of product and
process innovations.

Corporations rely more and more on external sources for their knowledge
inputs. Research and development activities are more and more outsourced
to specialised suppliers that act as providers of specialised knowledge
inputs. On the one side, the radical change in knowledge tradability has
positive effects on the efficiency of knowledge generation as it enables
higher levels of division of labour and specialisation among a variety of
specialised suppliers. The reduction of the adverse effects of the not-
invented-here syndrome, limiting the capability of corporations to
overcome the enclosures generated by the limited scope of their own
competences, comes as a consequence. The increased tradability of

9
knowledge also has positive effects in terms of larger opportunities to use
the market as a screening and selection device, better able than internal
hierarchies to sort projects that have more opportunities to succeed.

The new tradability of knowledge has radical effects on its exploitation

and appropriation, changing the distribution of knowledge rents along the
value chains. KIBS can appropriate an increasing share of the profits
associated with the generation and exploitation of knowledge. The limited
exhaustibility of knowledge and its powerful effects in terms of
extensibility and cumulability enables KIBS firms to retain an increasing
share of the profits and rents stemming from the generation of knowledge.
Profits shift upstream in the global value chains and concentrate in the
KIBS industries of advanced countries. Manufacturing companies in
advanced countries focus on the role of commercial platforms and retain a
declining share of the overall profitability. The profits of manufacturing
activities, left to industrialising countries, are squeezed (Amador and
Cabral, 2016).

Within KIBS, the new tradability of knowledge as a service, capitalised as

a financial asset and an IPR, benefits skilled workers of knowledge service
firms the most. The higher levels of participation of KIBS workers to
knowledge rents and the direct involvement of active entrepreneurs and
shareholders in KIBS firms increase the levels of wealth inequality and
contribute to enhancing the levels of rents, thus increasing income
inequality. The direct participation of creative workers – employing
various types of stock options and financial piece-rate systems – to the
rents associated with the exploitation of knowledge reinforces the process.

The new tradability of technological knowledge parallels the effects of

globalisation that engenders a radical structural change with a shift of
advanced countries away from the manufacturing industry and the
specialisation in service activities (Autor et al. 2020). Manufacturing
companies, more and more based in industrialising countries, rely on the
KIBS rapidly growing in advanced countries that become knowledge
economies, as shown in Figure 1 and Figure 2 (Antonelli and Fassio, 2016
and 2014).

10
In these figures, the share of employment accounted by manufacture
declines for every advanced country, with the exception of the Czech
Republic. Symmetrically, in the historical period analysed, the relevance
of KIBS is increasing sharply in European regions: it climbs in Sweden
from around 5% to almost 9%, in the UK from 7% to 10.6%, the
Netherlands from 8% to almost 10%.

These changes, in turn, affect in-depth the income distribution with two
different processes: i) the polarisation of labour markets, caused by the
decline of demand and increased unemployment of standard labour and
augmented demand of creative; ii) the increase of profits associated to the
generation, appropriation and exploitation of knowledge, mostly unshared
with low-skilled workers. Respectively, both wage and rent (wealth)
inequalities increase. Let us analyse each process in turn.

11
Figure 1. Employment share2 of KIBS and Manufacture all OECD
countries. Source: OECD.

Figure 2. Employment share of KIBS and Manufacture for some relevant

OECD countries (Australia, Germany, Spain, France, Italy, Netherlands,
Poland, Sweden, UK, USA). Source: OECD.

2
Drawing from OECD National Accounts tables, we exploit indexes of the share of employment (in persons) accounted
by KIBS and Manufacture as a proxy for their economic centrality.

12
Wage Inequality. The demise of the Chandlerian corporation engenders the
reduction of average wages at the system level: in large corporations, blue-
collar workers did benefit of high unit wages, far above baseline wage
levels in the economy at large, stemming from their high levels of
unionisation. In the corporation, in fact, unit wages did exhibit a strong
positive relationship with firms‟ size and profitability (Mueller, Ouimet,
Simintzi, 2017; Card, Heining Kline, 2017; Farber et al., 2018). Within
manufacture, instead of decreasing wages, we observe a contraction of
employment. Indeed, the bargaining power of unionised labour, even if
amid a declining trend across OECD countries (see Figure 3), defends
sticky wages in standard labour (Figure 4). Overall, the share of workers
protected by unions and benefitting of above-average wages declines.

We suggest that the new tradability of knowledge complements and

supports the specialisation of advanced economies in the generation and
exploitation of technological knowledge, the exit from the manufacturing
industries and the growth of KIBS sectors with major effects on the
polarisation of the labour markets in two sections: the market for creative
labour and the market for standard labour as well as the shift upstream in
the global value chains in the distribution of increased knowledge rents.

13
Figure 3. Employment and Average Wages on base 100 in 1990 (or at first
later date available). KIBS and Manufacture comparison. Source: OECD.

Figure 4. Union Density in OECD countries. Source: OECD.

14
Standard labour employed in the production of manufacturing goods is
exposed to the stiff competition raised by the entry of new large, low-wage
and labour abundant economies. Employment contraction is associated
with sticky wages. The markets for creative labour, able to participate
actively into the generation and exploitation of technological knowledge,
on the opposite, are protected by international competition by the unique
conditions of accessing and using the large stock of technological
knowledge, cumulated through time and implemented by high-quality
knowledge governance mechanisms. Such markets are characterised, on
the demand side, by the positive effects exerted by the knowledge-
intensive direction of structural change. The increased levels of knowledge
derived demand have, indeed, positive effects on both job opportunities
and wage levels. The increasing levels of wage inequality are reinforced
by the upstream shift of profits in the global value chains, their
concentration in the KIBS sectors and the participation of professional and
scientific entrepreneurship in their appropriation.

Rent (wealth) inequality. The corporate economy was characterised by

substantial levels of profit sharing among stakeholders. The organisation
of corporations was based upon several layers of management that enabled
white collars to participate into the large markups (Garicano, 2000;
Garicano, Rossi-Hansberg, 2006; Bloom, Garicano, Sadun, Van Reenen,
2014). The size of mark-ups associated to the persistent introduction of
process and product innovations in oligopolistic product markets, well
defended by relevant barriers to entry and imitation, were large but shared
with stakeholders so that actual profits were lower.

Scientific and professional entrepreneurship and small knowledge service

firms, instead, incur in much lower unit coordination costs as decision
making is concentrated in small groups of active shareholders directly
involved in management. The new tradability and appropriability of
knowledge are at the origin of a radical structural transformation that
weakens the mechanisms of income redistribution associated with the
corporation. It enhances, instead, the mechanisms of income concentration
based upon higher levels of profitability of small, knowledge-intensive
private companies, where the classical separation between ownership and
control exerted by the management shrinks, paving the way to new
profiles of knowledge and scientific entrepreneurship able to appropriate

15
knowledge rents directly as profits (Audretsch and Link, 2018). In the
knowledge economy, the share of income paid to capital is larger than in
the corporate economy. As a consequence, income inequality increases
through higher rent (wealth) inequality.

In our theoretical framework, the new forms of knowledge tradability and

the enhanced levels of knowledge appropriability, based upon ICTs and
the new institutional set-up, are part of a broader structural change where
knowledge is the central input and output. A structural change that
reshapes the organisation of technological knowledge generation and
exploitation at the system level and entails the demise of the corporation as
the core institutional mechanism not only for the generation and
exploitation of knowledge but also for the distribution of extra-profits and
rents to the working class, and the emergence of the KIBS sector, based
upon small firms and scientific entrepreneurship, with lower but resilient
wages, large profits and high levels of capitalisation of knowledge as a
financial asset.

The new tradability of knowledge, hence, has direct effects on the levels of
knowledge appropriability, increasing knowledge rents and the
polarisation of labour markets, differently remunerating creative and
standard workers, with a consequential increase in the levels of wage
inequality. The increase in both wage and rent inequalities reinforces the
increase in income inequality.

3. EMPIRICAL ANALYSIS

3.1 Data
We build a panel dataset of countries borrowing from two sources.
Namely, i) the Standardized World Income Inequality Database (SWIID
8.1, Solt, 2016) which is a valuable and extensive source for income
inequality data (in the forms of Gini indexes3) normalised across countries
and sources; and ii) various tables from the OECD repository.
3
From the word of the SWIID creator, Frederick Solt: «I think the clearest explanation of the Gini index is that it is half
the average difference in income between all pairs of units—say, households—as a percentage of the mean income of
those units. Okay, I said ―clearest,‖ not necessarily ―clear.‖ Anyway, it has a theoretical range of 0 (all households have
the same income) to 100 (one household has all the income and the rest have none), but Ginis below 20 or above 60 are
rare in the real world. There are good reasons to prefer other measures of inequality, and there are many options, but the
Gini is by far the most widely available» (https://fsolt.org/blog/2017/07/28/the-swiid-source-data.html)

16
SWIID is the output of a strenuous effort to generate freely available data
on inequality covering the maximum range of countries and years, through
harmonisation and imputation of various data sources4. We exploit it to
define our dependent variable: income inequality. As Florida and
Mellander (2016) report, income and wage inequality describe different
geographical distributions since they reflect different but interlinked
phenomena. Income inequality, indeed, is determined both by wage and
rent inequalities. Income inequality is, therefore, a proper measure to
investigate our research questions.

The Gini index is just one of the many measures used to grasp inequality.
We opted for it in order to maximise the length and breadth of our panel,
given that we want to explore the transitions of economies from one
regime to another. Figure 6 in the Appendix shows the correlations
between some indexes of inequality: the Gini on disposable and market
income from SWIID and other three indexes from OECD – the Palma
Ratio, the Percentile Ratio and the Gini, all of them computed on
disposable income. Different measures of inequality computed on the
same type of income are highly and positively correlated, whereas the
correlation between Ginis on market and disposable income is average
intensity. In the econometric analysis that will follow, we go for the Gini
on market income as the main dependent variable. Indeed, the difference
between market and disposable income is the mediation of the welfare
state redistributing income within the population. At this stage, we are
interested in the unmediated, direct effect of the knowledge economy
transition in income, duly accounting for state-level idiosyncrasies.

Figure 5 describes the market and disposable income inequality trends for
a panel of OECD countries. It portraits a generalised condition of rising
inequality but qualified by a certain degree of heterogeneity from country
to country. Most of the plotted countries experience rising inequality from
4
Jenkins (2015) examines two major sources of inequality data, namely SWIID and WIID. He expresses a conditional
favor for the use of the latter for comparative studies. SWIID, indeed, is the output of a not completely clear multiple
imputation methodologies on WIID raw data, pointing to maximize the countries time-series and making them
comparable, properties that are not provided by WIID. WIID, instead, leaves to the researcher the duty to match and
harmonize the series, with a large amount of discretion. Even though we are thankful for the insightful exercise, we do
not agree with Jenkins conclusions in two regards. First, as he brings evidence, empirical analysis from WIID and
SWIID for developed countries, whose data availability is larger, is consistent. Second, we think that relying on the
research efforts of established and trustable academics and institutions is necessary and advisable for new,
parsimonious, frontline research insights to be provided.

17
the „80s onwards, on average, as documented on the regional scale by
Rosés and Wolf (2018). France and Italy exhibit the renown U-shaped
trend (Piketty and Saez, 2003). As announced, market and disposable
income inequality follow very similar trajectories for most countries, but
figures in the lower panel exhibit more pronounced shapes. This indicates
that redistribution policies are at work.

The increasing centrality of KIBS seems to provide a reliable proxy of the

emergence of the knowledge economy. Therefore, we extract the share of
persons active in KIBS sectors over the total economy from the OECD
National Accounts tables.

18
Figure 5. Trends in income inequality and redistribution. Source: SWIID.

19
Another available measure of a country‟s knowledge intensity is R&D
investments as a portion of GDP. The amount of resources devoted to
research is undoubtedly correlated with the emergence of knowledge-
based firms, but the two are not measuring the same phenomenon. Indeed,
R&D investments, both from the business and the public sectors, may take
place – actually took place – even without incurring in a knowledge-
dedicated sector. KIBS firms now perform an increasing share of business
related R&D investments.

A feature undoubtedly related to the potential of knowledge resources in a

country is the endowment of human capital. The variable is taken from the
Penn World Tables (Feenstra et al., 2015) and is a combination of
workers‟ years of schooling and assumed return from education.

We are aware that the dynamics of knowledge production and use can
account for only a fraction of a vast, structural phenomenon as inequality,
which is mostly feeding itself. In the framework we proposed, the
globalisation of product and financial markets covers a pivotal role as a
trigger of the knowledge transition of industrialised countries. We measure
it as exports plus imports relative to GDP, extracted from the World
Bank‟s World Development Indicators. To comply with the argument put
forward above about the distributional struggles arising from de-
unionisation, we add the coverage of unions on employment, or union
density, to the list, as well as the unemployment rate. Moreover, we use
the log of GDP per capita at PPP to control for countries‟ economic
development. All these variables come from the OECD datawerahouse.

To make the investigation more robust, we follow Tridico (2018) and

acknowledge the importance of labour policies. In particular, the OECD
Employment Protection Legislation index (EPL) provides salient
information about laws governing individual and collective dismissals, i.e.
labour market flexibility. Tridico (2018) documents the expanding
flexibility of OECD labour markets and its negative impact on
redistribution. Furthermore, as Dorn (2016)‟s report suggests, the
demographic structure of a population may affect inequality even if the
real income distribution keeps constant among adult workers. Hence, we
control for population density, elderly dependency ratio (share of over 65

20
on 15-64 persons) and age-adjusted mortality rate (as an indicator of
societal life quality), once again from the OECD repositories.

We collect data on all these variables for OECD countries. However, in

the principal analysis, we retain only countries we think are, or potentially
may be, experiencing a knowledge economy transition. Data availability
for these variables is not homogeneous, which makes of our dataset a
strongly unbalanced panel covering at most 20 OECD countries5 for a
maximum of 27 years from 1990 to 2016. Table 4 and Table 5 in the
Appendix provide a brief description of these variables and summary
statistics.

3.2 Empirical strategy and results

As discussed in Stockhammer (2017) and Florida and Mellander (2016),
there is a large number of contributions spending efforts to explain the
determinants of (income, wage, regional) inequality (see e.g. Piketty and
Saez, 2003 and Rosés and Wolf, 2018). The present work investigates the
role of the changes in the organisation of the generation, appropriation and
exploitation of technological knowledge and in the economic structure of
advanced economies.

Equation (1) portrays in a formula the main relationships we have in mind:

Where i and t stand for country and year subscripts, KE is a matrix filled
by the knowledge economy transition measure – the centrality of KIBS
and BERD expenditures on GDP – and matrix X contains a set of control
variables progressively plugged into the model. To protect our estimates
from omitted variables, we proceed with a two-ways FE estimation,
therefore controlling for both the unobserved time-invariant heterogeneity
at the country level and the endogenous time effect, usually referred as
business cycle effect. All covariates enter the regression at the same point
in time of the dependent variable. Table 1 reports the first set of results.

5
The longest sample of countries involved in the main empirical exercises include: Austria, Australia, Belgium,
Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, New Zealand, Poland,
Portugal, Spain, Sweden, United Kingdom, United States. Depending on the covariates, the list of countries shrinks.

21
The first column introduces the knowledge economy variables only, which
are positive and significant. In the second round, variables accounting for
the distributional issues related to employment comes in: the estimated
parameters are significant and with expected signs. In the third column,
variables related to the structure of the economy step in but are not much
significant. Finally, the fourth column introduces the demographic
variables: the strongest, and significant, (negative) effect comes from the
elderly dependence ratio6. This first set of regressions, already introducing
a wide range of controls, does confirm the expected positive correlation
between the knowledge economy transition and income inequality within
advanced countries.

6
The VIF of the relevant variables (KIBS % and BERD expenditures) for these regressions is satisfactory, well below
10. Indeed, the highest value is that of KIBS (~5) followed by GERD (~2.3). However, the VIF for KIBS is pushed up
by the introduction of population density rather than by GERD, even though the two are correlated at 0.43.

22
Table 1. Two-ways Fixed Effect estimator7.
Dependent variable:
(Log of) Gini on Market Income
(1) (2) (3) (4)
BERD on GDP 0.027*** 0.026*** 0.030*** 0.024**
(0.007) (0.006) (0.007) (0.008)
KIBS % (Persons) 0.009* 0.012* 0.016*** 0.015***
(0.004) (0.004) (0.004) (0.004)
Openness -0.0001 -0.0001 -0.0002
(0.0001) (0.0001) (0.0002)
Union density -0.001** -0.001** -0.001*
(0.0004) (0.0005) (0.0005)
Unempl rate 0.003*** 0.004*** 0.005***
(0.0005) (0.001) (0.001)
HC 0.062. 0.063*
(0.033) (0.030)
GDP pc 0.037 0.066*
(0.026) (0.030)
EPL 0.020 0.035*
(0.016) (0.015)
Pop density -0.001*
(0.0003)
Elderly dep. ratio 0.003**
(0.001)
Mortality 0.001
(0.001)

Observations 393 376 343 339

R2 0.089 0.110 0.295 0.320
Adjusted R2 -0.035 -0.024 0.172 0.194
Note: . p<0.1; * p<0.05; ** p<0.01; *** p<0.001
Estimation produced with R package plm
Robust SE in parenthesis.

7
An R2 of 0.32 may appear low respect to a model with such a wide range of variables. However, one has to remind
this is a within R2, that is, it finds the total sum of squares on the demeaned outcome variable. The overall R2, obtained
through a LSDV with the very same model, scores as high as 0.93. Considering that inequality is a inherent, path-
dependent phenomenon, we think a 0.32 within-R2 is a satisfactory score.

23
Table 2 and Table 3 report a few robustness checks, with two different
estimators. The first column in Table 2 reproduces the last one in Table 1
as a reference to the main results. The second column tests the same model
on all available OECD observations, including considerably more
countries8. The most relevant differences are that, in Table 2, the
coefficient of BERD increases in size, whereas Openness and Mortality
get statistical significance.

The third column introduces a different operationalisation of KIBS sectors.

Indeed, Rodriguez and Ballesta (2010) provide a review of some
contributions pursuing a definition of KIBS and provide a table for
grouping ISIC Rev. 4 codes into a KIBS category. Their suggestion is to
include classes “62”, from “69” to “74” and “78”. However, data
availability for the Rodriguez and Ballesta (2010) classification is scarce
because many national statistical offices aggregate close classes in their
national accounts. As Antonelli and Fassio (2014) did in a similar work
using ISIC Rev. 3 categories, we included some additional classes to
maximise the number of observations. Hence, the classes exploited to
define the KIBS relevance in this paper are “62”, “63” and from “69” to
“75”. The third column uses the Rodriguez and Ballesta (2010) stricter
definition of KIBS sectors. The results are robust. Finally, the fourth
column switches from the Gini on market to disposable income. As
argued, both choices are legitimate, market income being an unmediated
income measure, whereas disposable income reflects already the
redistributive action of welfare states. In any case, the effect of BERD is
much larger in size.

In Table 3, we try to account for one potential source of relevant omitted

variables. We provide a more fine-grained accounting of institutional
characteristics of a country (even though we already control for labour
market stringency and country-level invariant features). We borrow from
Botero et al. (2004) their set of indexes collecting the set of laws
governing four crucial aspects of labour: individual and collective
employment, social security and civil rights. It implies the introduction of
time-invariant variables, undoable in a FE regression setting9. For this
purpose, Table 3 exploits the Within-Between Random Effect estimator
8
Indeed, the count of country-year observations depends on variables’ availability.
9
Both the Within and the LSDV estimators call out the time-invariant country-specific components by demeaning
variables or absorbing them through individual dummies.

24
(Bell, Jones, 2015). The rationale is to consider the data as hierarchical –
two levels: country and time – and estimate a random intercept model to
account for the multilevel structure. Variables enter the regression as
yearly deviations from the country mean (the shape of one-way FE
model). Year dummies are used too in order to control for common
shocks. Other than deviations from the mean, addressing the within
variance component, the researcher can insert variables country averages,
grasping the between component, or any other level-invariant
characteristic. Estimation happens via ML optimisation.

The first column in Table 3 reproduces, once again, the last one in Table 1
as a reference to the main results. Then, the second column introduces the
labour regulation indexes. Even though KIBS and BERD coefficients‟
shrinks in size and significance, they resist the new fine-grained controls.
Regarding column two, Social security laws is the only statistically
significant variable, displaying an inequality-protecting effect. The
remaining three columns repropose the robustnesses illustrated for Table
2, with the alternative Within-Between RE estimator and the labour
regulation indexes. No relevant issues are spotted. These results confirm
the hypotheses, but it seems appropriate to take into account the
limitations of our investigation.

25
Table 2. Two-ways FE estimator. Robustness checks.
Dependent variable:
(Log of) Gini on Market Income (Log of) Gini on Disposable Income
(1) (2) (3) (4)
BERD on GDP 0.024** 0.034*** 0.035*** 0.051***
(0.008) (0.007) (0.010) (0.010)
KIBS % (Persons) 0.015*** 0.015*** 0.013**
(0.004) (0.003) (0.005)
KIBS % (Persons, 2nd) 0.008**
(0.003)
Openness -0.0002 -0.001*** -0.0002 -0.0001
(0.0002) (0.0001) (0.0002) (0.0002)
Union density -0.001* -0.001 -0.001* -0.002*
(0.0005) (0.0004) (0.001) (0.001)
Unempl rate 0.005*** 0.004*** 0.004*** 0.003**
(0.001) (0.001) (0.001) (0.001)
HC 0.063* -0.001 0.065* -0.032
(0.030) (0.025) (0.031) (0.036)
GDP pc 0.066* 0.025 0.058. 0.050
(0.030) (0.026) (0.031) (0.038)
EPL 0.035* 0.030* 0.030. 0.036*
(0.015) (0.012) (0.016) (0.014)
Pop density -0.001* -0.0003 -0.001. -0.001*
(0.0003) (0.0003) (0.0003) (0.0004)
Elderly dep, ratio 0.003** 0.003* 0.003. 0.004*
(0.001) (0.001) (0.001) (0.002)
Mortality 0.001 0.003** 0.002 0.006***
(0.001) (0.001) (0.001) (0.002)

Observations 339 419 309 339

R2 0.320 0.317 0.316 0.316
Adjusted R2 0.194 0.201 0.181 0.189
Note: . p<0.1; * p<0.05; ** p<0.01; *** p<0.001
Two-ways FE estimation produced with R package plm
Robust SE in parenthesis

26
Table 3. Within-Between Random Effect Estimator. Robustness checks.
Dependent variable:
(Log of) Gini on Disposale
(Log of) Gini on Market Income
Income
(1) (2) (3) (4) (5)
BERD on GDP 0.024*** 0.017** 0.029*** 0.027*** 0.041***
(0.007) (0.006) (0.005) (0.007) (0.008)
KIBS % (Persons) 0.013*** 0.012** 0.012*** 0.010*
(0.003) (0.004) (0.003) (0.005)
KIBS % (Persons, 2nd definition) 0.007**
(0.003)
Openness -0.0001 -0.0001 -0.001*** -0.0001 -0.0001
(0.0002) (0.0002) (0.0001) (0.0002) (0.0002)
Union density -0.001** -0.001* -0.001* -0.001** -0.002**
(0.0005) (0.0005) (0.0003) (0.001) (0.001)
Unempl rate 0.005*** 0.004*** 0.003*** 0.003*** 0.002**
(0.001) (0.001) (0.0005) (0.001) (0.001)
HC 0.078** 0.041 -0.005 0.053. -0.058
(0.029) (0.028) (0.022) (0.029) (0.038)
GDP pc 0.063** 0.050* -0.007 0.044. 0.038
(0.022) (0.023) (0.020) (0.025) (0.030)
Pop density -0.001* -0.001. -0.0002 -0.0004 -0.001*
(0.0003) (0.0003) (0.0003) (0.0003) (0.0004)
Elderly dep, ratio 0.003*** 0.003** 0.003** 0.002. 0.004**
(0.001) (0.001) (0.001) (0.001) (0.001)
Mortality 0.001 0.001 0.004** 0.002 0.006**
(0.002) (0.002) (0.001) (0.002) (0.002)
Employment laws -0.070 -0.180* -0.090 -0.559**
(0.074) (0.078) (0.077) (0.190)
Social security laws -0.345* -0.333* -0.390** -0.308
(0.144) (0.141) (0.150) (0.369)
Civil rights 0.012 -0.141 0.026 0.268
(0.084) (0.088) (0.083) (0.216)
Collective relations laws 0.080 0.212* 0.094 0.456.
(0.094) (0.100) (0.093) (0.243)

Observations 339 353 440 321 353

Log Likelihood 874.491 898.211 1,105.322 812.913 791.480
Akaike Inf. Crit. -1,672.982 -1,714.421 -2,128.643 -1,543.826 -1,500.959
Bayesian Inf. Crit. -1,527.594 -1,555.896 -1,961.085 -1,389.197 -1,342.434
Note: . p<0.1; * p<0.05; ** p<0.01; *** p<0.001
Estimation produced with R package lme4
Country and year random intercepts

27
We might conjecture that there are chances for some common trends to
exist, which might yield a correlation where there is none, instead.
Therefore, we test for the presence of a unit root in the measures for
inequality, KIBS and GERD quota, but the variables look stationary10.
Nonetheless, we experiment with an Error Correction Model, estimated
through OLS, taking into account the presence of a co-integration between
the variables at stake. However, results (Table 6 in the Appendix) are not
robust: the autoregressive component of the model absorbs most of the
effects and BERD expenditures on GDP are barely significant in the long
run. We tested a dynamic model, augmented by the first lag of our
dependent variable, with the two-steps, difference-GMM estimator.
Similarly to the ECM case, results are not robust (Table 6 in the
Appendix): the KIBS centrality index is only slightly significant.
Interestingly, the autoregressive component is not.

We acknowledge that our empirical models do not provide support for a

causality claim, but we believe that the theoretical argument, together with
the empirical evidence provided by the FE and RE models, are sufficient
to set a discussion on the issues raised. Indeed, the FE and RE models
implemented altogether point into the same direction, that of a correlation
between KIBS centrality and BERD expenditures on GDP with market
income inequality measured with a Gini index. This correlation is robust to
a vast set of control variables embracing the most renown factors affecting
income distributions within countries – globalisation, union coverage,
unemployment and labour regulations – and others we considered relevant
– structural and demographic features and long-term inequality.

4. CONCLUSIONS

This paper dives into the interplay between the radical structural change
occurring in the transition to the knowledge economy and the increase of
income inequality. The analysis explores the effects of the changes in the
organisation of the generation, exploitation and appropriation of
technological knowledge on the rising levels of income inequality
experienced by advanced countries since the end of last century. We

10
We perform the Im et al. (2003) (IPS) and Maddala and Wu (1999) (MADWU) panel unit root tests, available for
unbalanced panel data in the plm R package, version 2.2-3. The IPS test on BERD investments on GDP does not reject
the null of a unit root, whereas the MADWU test does. We then perform the same tests on the residuals of the Gini
index regressed on BERD: both reject the null.

28
introduced a theoretical framework where the increasing levels of income
inequality are a direct consequence of the new specialisation of advanced
countries in the knowledge generation and exploitation based on the KIBS
industries and the consequent polarisation of labour markets.

The new role of small knowledge-intensive firms, specialised in the

generation and exploitation of knowledge as an economic good forming
the KIBS industry and the emergence of new intermediary markets for
knowledge as a service, have been paralleling the decline of the
Chandlerian corporation in knowledge generation and exploitation. The
increased levels of appropriability and tradability of technological
knowledge have triggered increasing levels of rent inequality that added to
the wage inequality augmented by the polarisation of labour markets and
the decline in the participation of unionised labour to the profitability of
corporations able to command the intra-muros generation and exploitation
of knowledge.

Exploiting available data mostly from the OECD data warehouse and the
Standardized World Income Inequality Database, we brought evidence of a
novel correlation that confirms the validity of the hypotheses. Even though
no causality is claimed in the paper, quite an effort has been made to stress
the main correlation with a heterogeneous set of controls and various
model specifications. Still, results were not robust in the models dealing
with the autoregressive component of inequality. This is a limitation of the
present analysis, which we aim at addressing specifically in future
research.

The evidence confirms the emerging limits in the ability of the knowledge
economy to share and distribute the returns from the generation of
technological knowledge that are now better appropriated but only by a
smaller portion of stakeholders.

29
ACKNOWLEDGMENTS

The authors acknowledge the comments of the referees and the director of this
journal, many attendants to the international conference ―Innovation and industrial
economics‖ held at the Nanjing University, June 2018 and the 20 th AISSEC
Conference ―Rise and Decline of Economies: A Comparative Perspective‖, Collegio
Carlo Alberto, Torino, October 2018 and Guido Pialli. The funding of the research
project PRIN 20177J2LS9 is also acknowledged.

CREDIT AUTHORS STATEMENT FILE

Authors have equally shared the overall research burden.
Cristiano Antonelli: Conceptualization, Methodology, Writing.
Matteo Tubiana: Conceptualization, Methodology, Formal Analysis, Data Curation,
Writing.

30
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APPENDIX

Figure 6. Correlation between indexes measuring inequality. Source:

OECD and SWIID.

37
Table 4. Variables description. Source: own elaboration.
Variable Source Type Description
Gini Mkt SWIID Dependent Gini on market income
Share of Persons
OECD National
KIBS % Main explanatory accounted by KIBS on
Accounts
total economy
Business-related
BERD on GDP OECD Main explanatory
expenditure in R&D
Export plus imports
Openness World Bank WDI Main control
relative to GDP
Unemployment rate of
Unempl rate OECD Main control
the population
Coverage of unions on
Union density OECD Main control
employment
combination of
workers’ years of
HC Penn World Tables Main control
schooling and assumed
return from education
GDP pc OECD Main control GDP at PPP per capita
Index of stringency of
EPL OECD Robustness control
the labour market
Pop density OECD Robustness control Population density
Share of over 65 on 15-
Elderly dep ratio OECD Robustness control
64 persons
Age-adjusted mortality
Mortality rate OECD Robustness control
rate
Aggregate index on
Employment laws Botero et al. (2004) Robustness control individual employment
relations
Aggregate index on
Collective relations laws Botero et al. (2004) Robustness control collective employment
relations
Aggregate index on
Social security laws Botero et al. (2004) Robustness control social security and
health expenditures
Aggregate index on
Civil rights Botero et al. (2004) Robustness control
civil rights

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Table 5. Summary statistics of models variables. Source: own elaboration.

Statistic N Mean St. Dev. Min Pctl(25) Pctl(75) Max

Gini market income 659 46.625 4.461 29.100 44.900 49.250 53.600
KIBS share (Persons) 418 6.531 1.871 2.356 5.123 7.724 11.730
BERD on GDP 574 1.282 0.785 0.081 0.703 1.795 3.721
Openness 691 72.630 34.875 16.014 51.347 84.652 226.041
Unemployment 641 7.816 4.187 1.777 4.820 9.577 27.466
Union density 604 33.282 20.292 7.800 18.300 44.200 87.400
GDP PPP pc 600 10.209 0.397 8.684 9.967 10.496 11.113
HC index 600 3.177 0.354 1.940 2.974 3.458 3.734
Pop. density 661 154.288 143.353 2.220 27.250 230.910 515.230
Elderly dep. ratio 660 22.869 5.093 7.390 19.133 25.892 45.180
Standard. mortality 599 8.924 1.597 4.530 7.760 9.980 15.260
EPL 559 2.122 0.851 0.257 1.560 2.679 4.833
Employment laws 696 0.510 0.205 0.161 0.329 0.708 0.809
Social security laws 696 0.736 0.071 0.624 0.676 0.786 0.873
Civil rights 696 0.660 0.114 0.468 0.565 0.755 0.848
Collective relations laws 696 0.458 0.148 0.188 0.350 0.592 0.667

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Figure 7. Proportion of missing by variable. Source: own elaboration.

40
Table 6. GMM and ECM estimations. Only main regressors displayed.
Dependent variable:
(Log of) Gini on
(Log of) ∆Gini on Market Income
Market Income
difference GMM ECM
(1) (2)
(Log of) Gini on Market Income (L1) 0.298 -4.164**
(0.329) (1.390)
KIBS % (Persons) 0.026*
(0.013)
BERD on GDP -0.011
(0.047)
∆BERD on GDP 0.463
(0.290)
BERD on GDP (L1) 0.355*
(0.181)
∆ KIBS % (Persons) 0.088
(0.142)
KIBS % (Persons) (L1) -0.066
(0.078)

Observations 296 300

R2 0.263
F Statistic 3.658*** (df = 23; 236)
Note: . p<0.1; * p<0.05; ** p<0.01; *** p<0.001
GMM and ECM estimations produced with R package plm
Robust SE in parenthesis

41