Economic development and wage inequality: A complex system analysis

Abstract

Adapting methods from complex system analysis, this paper analyzes the features of the complex relationship between wage inequality and the development and industrialization of a country. Development is understood as a combination of a monetary index, GDP per capita, and a recently introduced measure of a country’s economic complexity: Fitness. Initially the paper looks at wage inequality on a global scale, over the time period 1990–2008. Our empirical results show that globally the movement of wage inequality along with the ongoing industrialization of countries has followed a longitudinally persistent pattern comparable to the one theorized by Kuznets in the fifties: countries with an average level of development suffer the highest levels of wage inequality. Next, the study narrows its focus on wage inequality within the United States. By using data on wages and employment in the approximately 3100 US counties over the time interval 1990–2014, it generalizes the Fitness-Complexity metric for geographic units and industrial sectors, and then investigates wage inequality between NAICS industries. The empirical time and scale dependencies are consistent with a relation between wage inequality and development driven by institutional factors comparing countries, and by change in the structural compositions of sectors in a homogeneous institutional environment, such as the counties of the United States.