Role of trade openness and technology transfer induced changes in reducing income inequality: A panel data analysis

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.