Internet Connectivity and Income Inequality

The Internet is widely seen as a general-purpose technology that has enabled tremendous innovations in the digital economy and boosted economic growth. After considerable skepticism as to the effects of computers and information technology on productivity during the 1990s, its positive effects are no longer doubted. Policy makers worldwide recognize the importance of advanced Internet connectivity as an integral technology supporting a range of objectives, including the creation of high-quality jobs, improvements in the quality of life, and safeguarding environmental goals.

Yet the past decade has also revealed many areas in which these upsides of the rapid diffusion of the Internet are accompanied by potential downsides, resulting in differentiated patterns of effects that often are at cross-purposes with these goals. Social science research has not been insensitive to these ambiguities and contradictions but the reception tends to bifurcated into two relatively disconnected communities of techno-optimists and techno-pessimists. This paper seeks to overcome this chasm by developing a theoretically and empirically grounded approach of one important yet largely unexplored dimension—the co-evolution of Internet technology and income distribution.

Using an institutional economic lens, the paper starts with a discussion of the various processes through which the Internet affects income distribution at global and at national levels. Internet connectivity has allowed the outsourcing of production, business processes, and services into global supply chains that have helped increase productivity and lower prices for consumers. It has generated new economic opportunities and has lifted millions of workers in low income nations out of poverty. At the same time, global connectivity has created new forms of exploitation in these nations and has undermined the livelihood of many workers and middle class families in higher income countries.

Digital technology also contributes to the disappearance or shrinkage of a range of employment opportunities, including professions that until recently seemed immune to technological onslaught and automation, such as legal clerks and attorneys. Moreover, an increasing number of income-generating activities are demonetized, as illustrated, for example, across cultural industries and in professions. As well, the emergent sharing economy, while providing opportunities for marginalized groups to earn an income, does so at considerable potential downsides: lack of benefits, service provision at own risk, and highly fluctuating income. Consequently, within an increasing number of countries, Internet connectivity and the diffusion of digital technology has contributed to a considerable increase in the skewedness of income distribution.

While it is too early to provide a comprehensive empirical analysis of these multi-faceted and developments the paper juxtaposes its conceptual analysis with a first look at the data as found in a broad range of dispersed (and typically narrowly construed) studies as well as in original sources. There are strong hints that the visible national, regional, and global patterns are the outcome of a complex interaction of Internet connectivity, institutional arrangements, public policies, and socio-economic factors. The paper concludes with an outlook on future developments and articulates a research agenda that would help design effective policy responses to the challenges ahead.