Kim Kyung Hoon / REUTERS

The evidence suggests innovation does contribute to the wealth of the one percent—but it also increases social mobility.

Innovation is the underlying driver of economic growth and rising living standards. But recently, high-tech startups and tech workers have been blamed for rising inequality and for pricing residents out of housing in leading tech hubs such as San Francisco. Last year’s protests over Google Buses shuttling employees from the city to its Silicon Valley campus while the rest of San Francisco’s public transportation system was underfunded is perhaps the perfect case in point. At the same time, economists have found that as inequality has risen over the past couple of decades, the rate of innovation has fallen, especially since the economic crisis.

Is innovation really to blame for rising inequality?

A June NBER study by a team of economists from Harvard, the University of Pennsylvania, and the University College London takes a close look at the connection between the two. Specifically, it examines the connection between innovation (measured by patenting) and the widening economic gap at the very top—between the one percent and everyone else—across states between 1975 and 2010. It also examines the relationship between innovation and more conventional types of inequality between the upper and lower classes.

The graph below charts the connection between innovation (measured as patents per capita, the blue line on the graph) and the share of income held by the top 1 percent (the red line) over five decades, from 1963 to 2013. For much of this period there was a substantial gap between the two, with innovation outpacing the income share of the 1 percent. But then, right about the time of the economic crisis, the red line crossed the blue one, indicating that the 1 percent’s share of income surged past the rate of innovation.

But are the two actually related? And if so, how exactly?

The answer, it turns out, depends on what exactly is being measured.

First off, the study finds innovation to be rather closely associated with the increase in the share of income going to the one percent. After controlling for a wide range of factors that are likely to affect innovation, it finds that innovation accounts for roughly 17 percent of the total increase in the share of income held by the top 1 percent between 1975 and 2010. In the highly innovative state of California, innovation explains roughly 22 percent of the increase in the top 1 percent’s share of income over the same period. Furthermore, the study’s results show a connection between highly impactful star inventors and inequality.

But here’s the catch. The study finds little connection between innovation and other, more conventional measures of inequality like the Gini coefficient. When the researchers look at the connection between innovation and the economic gap between the top 10 percent of Americans and everybody else, they find the effect is mainly negative: Increasing rates of innovation are actually associated with declining inequality across states. “Together, these results strongly suggest that the link between innovativeness and top income inequality is mainly driven by what happens at the very top of the income distribution,” the authors write, “and specifically at the top 1% income share.” In other words, while innovation makes the very rich richer, it has little effect on any other type of inequality.  

The same result comes through in a basic analysis I conducted with my Martin Prosperity Institute (MPI) colleagues Charlotta Mellander and Isabel Ritchie. Take a close look at the maps below, which compare innovation and inequality across America’s 350-plus metro areas.

The first is a map of innovation based on patents per 10,000 people. The metros with the highest rates of innovation include obvious suspects like San Jose in the heart of Silicon Valley, nearby San Francisco, and the tech hubs of Austin, Seattle, San Diego, and the North Carolina Research Triangle. But Burlington, Vermont; two Rochesters in Minnesota and New York; Poughkeepsie, New York; Sheboygan, Wisconsin; and college towns like Corvallis, Oregon; Ann Arbor, Michigan; Boulder, Colorado; and Ithaca, New York, also number among the top 20 leading innovation clusters.

The second is a map of income inequality based on the Gini coefficient. Among large metros, only New York and Miami number among America’s most unequal on this score. The places with the most income inequality in the nation include Bridgeport, Connecticut; College Station and Midland, Texas; Athens, Brunswick, and Columbus, Georgia; Naples, Gainesville, and Tallahassee, Florida; Charlottesville, Virginia; Santa Fe, New Mexico; Jackson, Tennessee; Columbia, Montana; and Santa Barbara, California.

Comparing these maps, we see that while high levels of inequality and innovation sometimes overlap, they do not generally occur in the same exact places. Only Corvallis, Oregon, and Ann Arbor, Michigan, number among the top 20 on both lists. Though they may be unaffordable, and some suffer from higher levels of economic segregation, leading tech hubs actually rank much lower on income inequality. Boston comes in at number 50, San Francisco at 55, Austin at 93, San Jose at 144, and Seattle at 233. In fact, the correlation between innovation and inequality is statistically insignificant, meaning there is no statistical correlation between the two.

Even if inequality does make us more unequal, it may also help to create more dynamic economies that give rise to greater upward mobility. To get at this, the study examines the connection between innovation and social mobility across America’s 741 commuting zones, which reflect common commuting patterns in neighboring counties (both urban and suburban). Among these urban commuting zones, the authors point out, the three with the largest income share accruing to the 1 percent are San Francisco (29.1 percent), San Jose (26.4 percent), and New York (23.6 percent)—three leading tech and innovation hubs.

Their main finding: Innovation is positively and significantly related to upward mobility, as defined by whether children will be in the same, lower, or higher income bracket than their parents. Furthermore, they find this relationship to be driven by new “entrant innovators” as opposed to established incumbents. In other words, places with a lot of relatively new or novel innovation have more upward mobility. Among the cities where children are more likely to exceed the income of their parents are innovation hubs like San Jose, San Francisco, San Diego, Seattle, New York, Boston, and Los Angeles. Though the wealthy are accruing more money in these places, they’re also giving more people the opportunity to join in on that wealth.

This relationship between innovation, inequality, and economic mobility shouldn’t come as much of a surprise. Breakthrough innovations from companies like Google, Microsoft, and Apple have produced some of our wealthiest billionaires. But they appear to have little if any effect on other aspects of inequality. What’s more, mobility is higher in clusters of high levels of innovation.

In other words, innovation has exactly the kind of disruptive effects that the economist Joseph Schumpeter told us about. It enriches leading entrepreneurs and entrepreneurial places, which usher in the great gales of creative destruction that create new industries, without necessarily increasing the gap between the upper and lower classes.

As a result, it makes little sense for mayors and business leaders to try to cope with inequality or affordability by clamping down on innovation or tech culture. It is innovation that creates the dynamism that generates overall wealth and underpins economic mobility. What we need instead are strategies that stoke the engine of innovation, while improving the conditions of those lagging behind.

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