New evidence toward solving the puzzle of innovation and inequality. The role of institutions

The new information age and the phenomena of digitalization and automation make investments in research and development (R&D) indispensable for economic and social progress. Meanwhile, increased inequality within countries and its effects on advanced countries is one of the consequences of the recent turbulences in the global economy. These two dynamics open debates around the still-unresolved nature of the relationship between innovation and inequality. This paper contrasts postulates from the existing theory and relevant empirical evidence to argue that the analysis of the positive and complex co-evolution of inequality reduction and technological progress in Europe implies a recombination of factors that highlights institutions as the backbone of the relationship. The results of this analysis based on time series / cross-section regressions with panel data from a sample of 20 European countries for the period 1995–2017 show the relevance of structural and institutional aspects within the region, while two sets of countries evince a dissimilar European behavior in the relationship under study. According to our findings, it is plausible to argue the existence of a virtuous circle defined by the combination of social protection contributions with innovation policies that certainly help settle the controversial relationship between innovation and inequality.