Abstract:
It is theorized that transfer of technology from developed to developing countries
increases the demand for skilled labor required to operate this technology. This
increases the wages of the skilled labor relative to the wages of the unskilled wages and
leads to higher income inequality. The higher wages of the skilled labor send a signal
to the unskilled labor to improve their skills through education. Once a significant share
of labor force attains better skills, the demand for the remaining unskilled labor goes
up and increases their wages, which in turn leads to reduction in income inequality.
This study examines the impact of trade openness on the income inequality in the
developing and developed countries. Additionally, we see if technology transfer and
changes in the ratio of skilled to unskilled labor and educational attainment have any
role in influencing the income inequality. We used panel data for 104 countries from
both developed and developing countries during 1980-2014. We estimated the
relationship using pooled OLS, fixed effects and random effects panel regression
analysis as well as system GMM technique for robustness check. We find that trade
openness, expenditure on education and ratio of the skilled to unskilled labor
significantly reduces inequality in both developed and developing countries. Increase
in technology transfer and religion in politics significantly reduces income inequality
only in the developing countries but corruption increases income inequality in the
developing countries. An important policy implication of our findings is that
governments in the developing countries need to promote the import of technology.
They also need to increase expenditure on education to convert unskilled workers into
skilled workers.
