Regional Research and Development Intensity and Earnings Inequality

Susan Dadres and Donna K. Ginther
Economic Review, Vol. 86, No. 2, 2001

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Investment in technology increased rapidly in the United States during the past two decades, leading some to herald the birth of a "new economy." This new economy, marked by rapid productivity growth, rising incomes, low unemployment, and moderate inflation, creates a "rising tide that lifts all boats." However, during the same period U.S. earnings and income inequality increased not only between groups defined by schooling and experience but also within these groups.

Although many researchers point to technology as the leading explanation for the increase, a cause-effect relationship is difficult to establish. In this article the authors examine technology's effect on earnings and income inequality by using interstate differences in technology. Their analysis, using data from the 1979–94 period, shows that workers earn a wage premium in high-technology states. Low-technology states experience higher measures of between-group earnings inequality as measured by the college wage premium—likely the result of the relative scarcity of skilled workers. In addition, higher rates of technological investment are weakly correlated with increased family income inequality, but these effects dissipate when additional variables are added to the model.

The authors also find that technology accounts for approximately one-third of the increase in within-group male earnings inequality. The article concludes that the effects of technological investment are smaller than expected and that technology is not the sole factor contributing to the increase in earnings inequality.

June 2001