Technology Progress, Trade Openness, and Income Inequality: A Cross-Country Empirical Study

Abstract

Since the 1990s, many countries encountering trade liberalization and rapid technological progress have experienced rising within-country income inequality. This paper investigates relationships between trade openness and income inequality in both cross-country and country-specific framework. Using a panel of 61 countries over a period from 1975 to 2005, this study estimates a threshold regression model to identify an inverted-U relationship between openness and inequality with threshold effects of technological progress. On the one hand, income inequality among individuals in countries with less advanced technologies might be getting worse when their trade becomes more opened. On the other hand, for countries with a higher degree of technology advancement, trade openness tends to improve their income inequality.