By Philippe Aghion and Rachel Griffith

IFS Deaton Review of Inequalities (Mar 2022).

Date Published: Mar 2022

Innovation can affect inequalities in many ways – increasing some inequalities and decreasing others. An innovation can introduce a new good, improve the quality of existing goods, or lead to new ways of doing things. It can be produced by large firms, by small firms, by individuals working in their garden shed, by the public sector or by charities or non-governmental agencies. The

impact of any particular innovation on inequalities will depend importantly on who controls the property rights to exploit the innovation and what they decide to do with it. The introduction of an innovation can affect the power of different actors in a market, the way markets work, and the returns to different attributes of actors in the market. All of these factors and more will influence how innovation affects inequalities.

In this commentary, we briefly discuss the broader issues of the impact that innovation can have on inequalities, and what we know (or don’t know) about how innovation might affect different inequalities. We then focus most of our attention on the impact of firm-level innovation on income inequality. On the one hand, innovation increases top income inequality, as it generates innovation

rents. On the other hand, because it involves creative destruction, that is, new entrants replacing old incumbent jobs or firms, innovation also increases social mobility. In addition, innovating firms tend to create more ‘good jobs’, which involve longer tenure, more intense training on the job, and steeper dynamic wage profiles. There are two caveats however. The first caveat is that

yesterday’s innovators tend to become entrenched incumbents today, and can then try to prevent future innovation and new entry. The decline in US productivity growth, together with the increase in concentration and rents since the early 2000s, illustrates this fact. This speaks to the importance of having competition policy – in particular to regulation to mergers and acquisitions

– that does not allow superstar firms to become hegemonic and thereby discourage innovation and entry by other firms. The second caveat is that not everyone has an equal opportunity to become an innovator: parental income, parental education and parental occupation each play an important role in the probability for an individual to become an innovator.