Economic complexity and income inequality: evidence from Italian regions

This chapter fits a recent and growing literature investigating whether the degree of economic complexity in a region affects income inequality. The degree of product sophistication in a region can positively or negatively affect the occupational choice of workers, binding their available options on education, human capital accumulation, bargaining power, and consequently earning dynamics. Using data on 21 Italian regions between 2004 and 2019, we test for the relationship between the economic complexity index and income inequality using panel fixed effects and instrumental variables regressions. Our estimates show that ceteris paribus, regions in which economic complexity is higher, are regions where income is less equally distributed, but only after two or three years. We also find that this relationship turns negative in the North-East, which is the area of Italy in which the level of institutional quality and technological diversification is the highest.