The impact of technological change on income inequality in selected asian countries

VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM – JAPAN UNIVERSITY NGUYEN THANH BINH THE IMPACT OF TECHNOLOGICAL CHANGE ON INCOME INEQUALITY IN SELECTED ASIAN COUNTRIES MASTER THESIS PUBL

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM – JAPAN UNIVERSITY

NGUYEN THANH BINH

THE IMPACT OF TECHNOLOGICAL CHANGE ON INCOME INEQUALITY IN

SELECTED ASIAN COUNTRIES

MASTER THESIS PUBLIC POLICY

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM – JAPAN UNIVERSITY

NGUYEN THANH BINH

THE IMPACT OF TECHNOLOGICAL CHANGE ON INCOME INEQUALITY IN

SELECTED ASIAN COUNTRIES

MAJOR: PUBLIC POLICY CODE: 8340402.01

RESEARCH SUPERVISOR:

Dr VU HOANG LINH

Hanoi, 2022

COMMITMENT

I assure that the thesis title "The impact of technological change on income inequality in selected Asian countries" is my personal research under the supervision of Dr Vu Hoang Linh The data used in the thesis is truthful, and the quantitative analysis and conclusions

of the thesis were not public in any other research The source of citation for this thesis is fully stated I am able and willing to take responsibility for my thesis

Hanoi, June 2 nd , 2022

Author Binh Nguyen Thanh Binh

ACKNOWLEDGEMENT

While writing my master thesis, I get much valuable encouragement, guidance, and support that help me complete and attain knowledge and wonderful experiences

With all my respect and gratitude, I would like to first express my sincere appreciation to

my supervisor, Dr Vu Hoang Linh – Lecturer in the Master of Public Policy Program, for his enthusiastic instruction throughout my research process His insightful advice, scientific knowledge, and support have inspired me and helped me improve my research Secondly,

I would like to express my gratitude to Dr Nguyen Thuy Anh, who has guided me from

my day in the bachelor's program in the University of Economic and Business - Vietnam National University I also would like to show my appreciation to all of my Vietnamese and Japanese professors, including Dr Dang Quang Vinh, Prof Fujimoto Koji, Prof Okamoto Naohisa, and Prof Naka Shigeto for their valuable knowledge

I would also like to thank Ms Pham Thi Lan Huong and Ms Nguyen Thi Huong - Program Assistant of the Master's Program in Public Policy, for their kind support during the program

Finally, I would like to thank my friend at Vietnam - Japan University for giving me many memorable experiences

TABLE OF CONTENTS

LIST OF TABLES i

CHAPTER I INTRODUCTION 1

CHAPTER II LITERATURE REVIEW 4

CHAPTER III THEORETICAL FRAMEWORK 11

3.1 Income inequality 11

3.1.1 Definition 11

3.1.2 Measurement 11

3.1.3 Adverse effects of income inequality 11

3.2 Technological changes 13

3.2.1 Definition 13

3.2.2 Measurement 13

3.2.3 Effect of technological change on the economy 13

3.2.4 Effects of technology change on income gap 15

3.3 Other factors affect income inequality 17

3.3.1 Education 17

3.3.2 Globalization 18

CHAPTER IV THE IMPACT OF TECHNOLOGICAL CHANGE ON INCOME INEQUALITY 20

4.1 Data and empirical methodology 20

4.1.1 The model 20

4.1.2 Data 21

4.2 Empirical result 24

4.3 Robustness 26

CHAPTER V POLICY RECOMMENDATION 29

5.1 Increase national technology capability 29

5.1.1 Improving the accessibility and capability of technology 29

5.1.2 Guiding technological changes 31

5.1.3 Preparing for the technological changes 31

5.2 Develop education system 32

5.3 Take advantage of globalization 32

CONCLUSION 34

REFERENCE 35

APPENDIX 40

i

LIST OF TABLES

Table 4.1 Fixed effect regression result 24 Table 4.2 GLS random effect regression result 27 Table 4.3 ML random effect regression result 28

analysis Error! Bookmark not defined.

Although technological change is essential for growth and development, the distribution effect that technology change cause is debatable Researchers have tried to identify the relationship between technological advancement and the income inequality in both developed countries (e.g., Antonelli & Scellato, 2019; Blum, 2008; Freeman, 2011; Van Reenen, 2011) and developing countries (e.g., Antonelli & Gehringer, 2017; Gravina & Lanzafame, 2021; Jaumotte et al., 2013)

Asia has been one of the fastest-growing regions in the world in recent years (IMF, 2021) Technological progress help Asian countries increase growth by improving productivity and creating new jobs (Sedik, 2018) However, it could also be observed that income inequality has risen in most Asian countries (ADB, 2013) Understanding the cause of inequality in Asia is crucial for the sustainable development of Asian countries Without proper control over inequality, it could cause harm to the development of the country of the region as a whole High inequality could lower the impact of economic growth on reducing poverty, negatively impacts the growth rate and harms social, and political stability (Cornia

& Court, 2001; Zhuang, 2018; UN, 2020)

This paper will explore the impact of technological change on income inequality in selected Asian countries in the 21st century It will first examine the impact of technological changes

on income inequality in different provinces of Vietnam to see how each province reacts to

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technology changes From the situations in different provinces, the paper will provide recommendations to limit the negative impact of technological progress on income inequality in Vietnam

Problem statement

The impact of technological change on income inequality, in general, is debatable The speed of technological change could have both positive (Antonelli & Gehringer, 2017) and negative (Gravina & Lanzafame, 2021; Jaumotte et al., 2013) impacts on reducing income inequality Without proper control over income inequality, it could harm development (Cornia & Court, 2001; Ostry, Berg, & Tsangarides, 2014; Berg & Ostry, 2011; Oishi, Kesebir & Diener, 2011) However, few studies focus on analyzing the effect of technological change on income inequality in Asia Understanding the impact of technological change on inequality in Asia countries provides a better understanding of technological change in Asia It contributes to a better understanding of its impact in general The Government could use this knowledge to devise a better development strategy

to archive sustainable development

Research purpose

This thesis aims to evaluate the impact of technological change in 22 middle-income Asian countries From the evaluation, the research aims to understand the cause of income inequality better and propose a suitable policy to help narrow the income gap in these countries

Research question

This master thesis aims to answer two main questions:

Does technological change widen or narrow the income gap in Asian countries in recent years?

How much does technological change affect income inequality?

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Research scope and time

The research will focus on the period from 2011 to 2019 in 22 developing Asian countries, including Azerbaijan, Bahrain, Bangladesh, Cambodia, China, India, Indonesia, Israel, Kazakhstan, Kuwait, Kyrgyz Republic, Lebanon, Malaysia, Mongolia, Pakistan, Philippines, Qatar, Russian Federation, Tajikistan, Thailand, Turkey, Vietnam

Research significance

This thesis will overview the impact of technological changes on income inequality in selected Asian countries from 2011 to 2019 After viewing the overall impact of technological changes on income inequality, this thesis will further analyze the effect of technology on income inequality, especially its effects on Asian countries in recent years

in Asia Finally, this research will contribute an original research focusing on the impact of technological change in middle-income Asian countries

Structure of research

This thesis is organized as follows:

Chapter I: Introduction

Chapter II: Literature review

Chapter III: Theoretical framework

Chapter IV: The impact of technological change on income inequality

Chapter V: Policy recommendation

Chapter VI: Conclusion

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CHAPTER II LITERATURE REVIEW

Inequality

Cingano (2014) explores the trend of income inequality in OECD countries and its impact

on economic performance with the data collected from the OECD countries from the 1980s

to 2011 The author observes an increase in the income gap across all countries, with different paces in each country The income gap is the result of the faster accumulation of the higher-income class and reflects the vulnerability of the lower-income class Using the econometric analysis, the author finds that inequality harms economic growth in the long run The gap between low-income households with the rest of the population is the main factor that affects economic growth The paper also evaluates the evidence for the effect of differences in human capital on growth The research shows that widening the income gap decreases the skills development of individuals with poorer parental education backgrounds, both in terms of the quantity and quality of education attained The author recommends that redistribution policies using taxes and transfers and promoting equality

of opportunity in access to and quality of education are good tools for improving social outcomes and sustaining long-term growth

De Maio (2007) contributes a conceptual introduction to eight ways of measuring income inequality These include the Gini coefficient, Atkinson index, Coefficient of variation, Decile ratios, Generalized entropy index, Kakwani progressivity index, Proportion of total income earned, Robin Hood index, and Sen poverty measure Each measurement provides

a different perspective on income inequality The Gini index is the most popular index to measure income inequality However, the Gini index cannot show the differences between different inequalities The Atkinson index includes many inequality measures It allows for each section of the income spectrum to have different weights The Coefficient of variation

is calculated using the mean of income distribution to divide the standard deviation However, this method cannot apply to other than data with normal distribution Decile ratios are calculated by dividing the income earned by the top percentage of households by

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the lowest, for example, the top 20% and the lowest 20% The Decile ratios enable sensitive analyses to examine the importance of each income spectrum The Generalized entropy index is similar to the Atkinson index The generalized entropy index had an advantage over the Atkinson index in that it could be broken down into parts to analyze area effects Kakwani progressivity index is used initially to measure the progressivity of tax systems The Kakwani progressivity index is formed based on the Gini framework The Proportion

of total income is the income of the poorest nth% of the population compared to the total income This method is easy to calculate However, it has limited insight into the income distribution The Robin Hood index or the Pietra ratio is the proportion of income that needs

to be transferred from the higher-than-average income to the lower-than-average to achieve

an equal distribution The Sen poverty measure combines the Gini coefficient for people under the poverty line with their average income and the headcount poverty ratio

Cornia & Court (2001) focus on the changes in national-level income inequality and the relationship between poverty, inequality, and economic growth They used the World Income Inequality Database (WIID) to conduct the study In the research, they find five main issues Firstly, the trend in income inequality since the early-mid 1980s has risen in most countries Secondly, the technological change, unreasonably liberal economic policy regimes, and how economic reform policies were implemented are the main factors that cause the rise in income inequality worldwide Thirdly, a high level of income inequality

or a continuous rise in the income gap reduces the effort of poverty reduction At all growth rates, the higher the income gap, the lower the impact of economic growth on reducing poverty Fourthly, a high level of inequality negatively impacts the growth rate and harms social-political stability However, they also observed that the Gini index within 0.25 to 0.4 promotes growth

Oishi, Kesebir & Diener (2011) use The United States of America General Social Survey data from 1972 to 2008 to find an inverse relationship between income inequality and happiness due to perceived fairness and general trust They created a multilevel random-coefficient model to identify the negative effect of income inequality and happiness Then

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they used multilevel mediation analysis to reveal that higher income inequality leads to lower fair and trustworthy perceptions The researcher also found that the lower-income groups were more affected than the higher-income groups The research found that the reduction in happiness was due to a lower perception of fairness and general trust, not the reduction in income

Le & Nguyen (2019) tested six theoretical models to explain the impact of income inequality on economic growth in Vietnam at the provincial level These models are the political economy model, the capital market imperfection model, the integrated model, the socio-political instability model, the fertility/education issue model, and the social comparisons model They found strong empirical support for the negative impact of inequality on growth through the differences in education and fertility Based on the research results, the authors recommend policies to reduce the income gap and a fairer distribution of economic resources in Vietnam

Technological change

Rip & Kemp (1998) discuss the fundamentals of technological change Firstly, they discuss the definition of technology in different ways, such as specific tools and skills or the process that transform input into output They conceptualize technology as configurations that include artifacts, procedures, and humans to include a more extensive technical system Secondly, they consider technological change an active transformation process in which new technological regimes grow out of the old ones Technological change is associated with new technological availability, expectations, skills, management systems, new supplier–user interactions, regulatory changes and new ideas They also point out that many new technologies could only survive in a protective environment Therefore, they could be further developed and applied Thirdly, they discuss the co-evolution of technology and society and how they interact For example, technology evolves to suit the needs of manufacturers and consumers better, and at the same time, society tries to accept the new technology through coercion, negotiation and learning Finally, they discuss how sociotechnical change can be guided through government intervention Government should

The impact of technological change on inequality

The impact of technological change on income inequality is debatable It could widen the income gap by affecting the labor market (Berman & Machin, 2000, Van Reenen, 2011; Antonelli & Scellato, 2019; Antonelli & Gehringer, 2017; Jaumotte et al., 2013) and through rent-seeking behavior (Riggins & Dewan, 2005; Krueger, 1974) Technological changes could also reduce the income gap by providing new ways and methods for everyone to improve themselves and their business (Khan et al., 2020; Vivarelli, 2012; Cheng, 2018; Schofield & Davidson, 1998; Allegretto & Autor, 2011; Cabraal et al., 2021) Van Reenen (2011) explains some of the wage and skill distribution trends in the late 20th and early 21st century The research was conducted based on various data and results from other research The author points out the task bias technical change evidence, and the trade induces technical change The result shows that technological progress increases income inequality due to increased demand for high-skilled workers and replacing manual workers Trading with low-wage countries like China increases the need to increase productivity through technological change Furthermore, both the globalization effect and the technological progression increase significantly impact the labor market

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Jaumotte et al (2013) examine the relationship between income inequality, technological progress, trade, and financial globalization The research uses a large data panel from both developed and developing countries from 1981 to 2003 The research also separates the effect of trade and financial openness due to globalization The research found that an increase in agricultural export reduces inequality, and tariff reductions benefit the poor more than the well-off They also found that FDI increases inequality due to it mainly focusing on the relatively high skill- and technology-intensive sectors, increasing the demand and wage of high-skilled workers According to the research, technological progress and domestic financial deepening widen the income gap They found that inequality increase when the share of agriculture employment rise while it drops when the share in industry increase They also found that increase in the average years of education reduces inequality because it enables more people to benefit from technological progression and globalization

Antonelli & Gehringer (2017) explore the effect of technological change and rent on income inequalities The authors used the data collected from 39 countries from 1995 to

2011 The dependent variable is the Gini coefficient The explanatory variables include tech and controls variables Tech is the proxy variable using the count of patent applications The control variables include trade openness, GDP per capita, and government spending When analyzing the sensitivity, the authors use the ratio between the fifth and the first quantile of income distribution to measure income inequality They confirm the hypothesis that the higher rate of introduction of innovation, the lower the levels of income inequality due to higher productivity They also confirm that the technological change toward high-skilled workers increases income inequality through the wage gap They propose that policies that help increase the introduction rates of innovations and promote competitiveness are the most effective tools for reducing income inequality

Antonelli & Scellato (2019) research the relationship between wage inequality and technological change through the Italian manufacturing financial accounting data from

1996 to 2005 They used a set of models that analyze the endogenous role of capital

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intensity in the production process The first model has two stages; the second stage will use the capital intensity calculated in the first stage Sub-sample models were used to analyze the effect in low- and high-tech sectors They found that small firms with lower wages have more substantial incentives to adopt labor-intensive technological innovations

In contrast, the more prominent firm did the opposite The authors prove that wage inequality is both the cause and the consequence of technological change Wage inequality increases the rents in the production process and the wage gap Therefore, wage inequality increases income inequality The authors recommend that the national and industrial level employment contract be better integrated at the firm level

Karni & Zilcha (1993) have explored the effects of Hicks-neutral, Harrod-neutral, and Solow-neutral technological progress on income inequality by using a stochastic process They examine these effect in an economy with overlapping generations, endogenous labor supply and each generation have a bequest motive They have proved in their model that the income distribution effect of technological changes depends on the nature of technology and the substitution elasticity between labor and capital Their results show that Hicks-neutral technological improvements will reduce income inequality after introducing technology For Harrod-neutral and Solow-neutral technological improvements increase the income equality if the elasticity of substitution in production is larger than or equal to one and smaller than or equal to one, respectively

Kharlamova (2017) analyzes the effects of technological changes on income inequality in European countries based on econometric apparatus in two periods, including from 2006 to

2017 and from 2010 to 2017 The author uses Kohonen self-organizing maps and cluster analysis to divide countries into 6 clusters Then the author uses a simple linear regression

to each country individually The model includes inequality as a dependent variable and labor productivity as an independent variable The Gini coefficient measures the inequality variable, and labor productivity represents technological advancement The author found that countries that reach a certain level of development and redistribution are less affected

by technological change due to the relatively small impact on the market The author also

3.1.2 Measurement

De Maio, F G (2007) has summarized eight ways of measuring income inequality These include the Gini coefficient, Atkinson index, Coefficient of variation, Decile ratios, Generalized entropy index, Kakwani progressivity index, Proportion of total income earned, Robin Hood index, and Sen poverty measure

Even though each of the measurements has pros and cons., the most used index from the abovementioned index is the Gini coefficient and the ratios between different groups The Gini coefficient ranges between 0 when archiving perfect equality and 1 if perfect inequality exists The Gini coefficient is calculated based on comparing the cumulative proportions of the population against the cumulative proportions of income they receive Using the ratios between different groups also has its benefit It is easier to calculate when compared to more complex coefficients such as Gini For example, the P90/P10 is calculated using the ratio between the 10% highest earner and the bottom 10% It gives a more intuitive statement to less technical audiences (Cornia & Summer, 2013) Because the ratio methods are simple to conduct, less technical audiences could understand the meaning

of the ratio easier Finally, Cornia, & Summer (2013) stated that it is more sensitive to the income distribution between research groups

3.1.3 Adverse effects of income inequality

Income inequality, to some extent, help create growth for the economy (Cornia & Court, 2001; Lazear & Rosen; 1981) Cornia & Court (2001) found that each country has its

in education, workers have a harder time reaching their potential As a result, a more equitable income distribution society could have a higher labor productive capability when compared to a society with uneven income distribution (Stiglitz, 2012)

Secondly, a high level of income inequality negatively affects investment Researchers point out that a society with a high-income gap has a lower perception of trust and happiness (Oishi, Kesebir & Diener, 2011), and lower trust results in a lower incentive to invest (Bertola, 1991; Alesina and Rodrick, 1994; Persson & Tabellini, 1994) Income inequality potentially creates a crisis In the research of Kumhof, Rancière & Winant (2015), they found that the faster wealth accumulation of the high-income households creates credit supply to sustain higher consumption levels for the low and middle-income households As

a result, the income to debt ratio rises and the probability of a crisis In the worst-case scenario, inequality could cause social unrest (Keefer & Knack, 2002) or make it challenging to solve conflict (Bardhan, 2005) and harm investment and growth

Thirdly, income inequality reduces the effectiveness of policies Researchers found that income inequality could result in a backlash against necessary reforms (Claessens & Perotti, 2007) or limit the provision of public goods that boost productivity and growth ( Bourguignon & Dessus, 2009) or the poverty reduction rate (Ravallion, 2004)

In conclusion, income inequality could have positive and negative effects on society With efficient income inequality, workers are motivated to work harder However, if the income

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gap is too high, it will harm the country's economic growth potential For example, income inequality reduces the investment in education, investment demand, and the effectiveness of policies, reducing the potential for the economy to develop further

high-3.2 Technological changes

3.2.1 Definition

According to the Cambridge dictionary, technology is the practical use of scientific discoveries As people find more discoveries and ways to apply these discoveries to daily life, technology will advance Technological change could occur in many aspects of life However, in this thesis, technological change will be defined as using inventions, innovations, and diffusion processes to increase the total output with a given input level (Seo, 2017)

3.2.2 Measurement

There are various methods to measure technological change within a country Some of the methods include many indicators in many fields, such as the method used by The World Economic Forum, the United Nations Development Programme, the United Nations Industrial Development Organization, and the RAND Corporation Other methods include using the number of patent applications (Mnif, 2016; Włodarczyk, 2017) or the indicator for the development of information and communication technology (ICT) (Untari, Priyarsono & Novianti, 2019; Khan et al., 2020) to represent technological change

3.2.3 Effect of technological change on the economy

Technological change help increase the overall output of the economy This effect can be seen in the Cobb- Douglas equation, in which the total output depends on the input of labor, capital and the total factor productivity

Y = aKᵅLᵝ

Y is the total output

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L is the total labor input

K is the total capital input

a is total factor productivity

α, and β are the elastic of capital and labor, respectively

According to the model, total output increases when capital and (or) capital increase or total factor productivity increase However, the total factor productivity is often considered the primary contributor to growth and technology is one of the major factors increasing the total factor productivity Many researchers have found empirical evidence of the output-boosting capability of technology, such as the result of Chien & Hu (2007), Marx (2010) James (2013)

Technology change also has an impact on the labor market Because technology helps create the same amount of output with less input, we might increase unemployment if we could not find the use for labor replaced by technology (Keynes, 1963) However, Vivarelli (2012) also points out some market compensation mechanisms for the labor market to reduce unemployment Firstly, introducing machinery that replaces workers could redistribute the worker into the sector where the machines are produced Secondly, with the higher income due to increased output, the demand for consumption and investment could increase employment Thirdly, due to technology reducing the amount of worker input to produce the same amount of product, the labor cost could decrease Therefore, the demand for labor might increase due to the drop in labor costs Finally, introducing new technology could create a new economic branch that creates more job opportunities However, the outcome of employment change due to technological changes is debatable and depends on many factors (Massa, 2015)

Furthermore, technology change also changes the amount and the quality of the labor needed Welch (1970) proposes that in order to implement new technologies effectively, firms need suited and qualified workers These kinds of technological changes are known

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as skill-biased technical changes Many researchers have found that these skill-biased technical changes are causing the income gap to widen (Berman & Machin, 2000, Van Reenen, 2011; Antonelli & Scellato, 2019; Antonelli & Gehringer, 2017; Jaumotte et al., 2013)

Overall, technological changes increase the overall income by increasing total output However, the effects of technological change on social aspects such as employment rate and wage are debatable

3.2.4 Effects of technology change on income gap

3.2.4.1 Widen income gap

Changes in technology cause a shift in demand in the labor market When firms want to implement new technologies effectively, they need workers who are well trained to suit the newer technology The increase in demand for high-skilled workers increases their wages while it could negatively affect other groups The income of the routine workers is the most affected by technological changes (Autor & Dorn, 2009; Van Reenen, 2011) Routine jobs are quickly replaced by technology due to the nature of the jobs Jobs such as clerks or assembly workers are rules-based, repetitive and strictly follow procedure Therefore it is more cost-effective to replace these workers with machines However, technology does not affect nonroutine, low-skilled jobs such as room services (Van Reenen, 2011) While replacing these jobs with a machine is possible, it is not as cost-effective as hiring a worker Many researchers prove that this skill-bias technical change is why technological changes increase income inequality in many countries (Berman & Machin, 2000, Van Reenen, 2011; Antonelli & Scellato, 2019; Antonelli & Gehringer, 2017; Jaumotte et al., 2013)

Even though technology helps increase total output, the accessibility of technology is different from group to group (Riggins & Dewan, 2005) For example, firms with more resources have a better chance of accessing a more cutting-edge technology Riggins & Dewan (2005) find that the ease of acquiring technology between different groups, such as different regions, groups of income or countries, can increase income imbalance in the

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society Moreover, with better access to technology, larger firms could seek rent through intellectual property, primarily patents Economic rent is the amount of money earned that exceeds the production costs While patents' purpose is to serve as an incentive to innovate, they also prevent innovation from others Some firms could use this to maintain their monopoly and prevent competition This rent-seeking behavior rent-seeking could cause inequality to be deepened and long-lasting (Krueger, 1974)

In summary, technological change could widen the income gap Technological changes increase income inequality by affecting the labor market through the accessibility of technology and rent-seeking behavior

3.2.4.2 Narrow income gap

Technology change could widen the income gap, but it also can narrow the gap With high technology development, small and medium-sized enterprises (SMEs) could also benefit from technological change With a well-developed technology system, SMEs could acquire better technology to increase their competitiveness (Khan et al., 2020) This result increases the economy's output and increases the income of different worker groups in the economy Therefore, technological change could reduce income inequality

While technology can replace labor, it could also enhance the worker's productivity without reducing the labor needed Therefore, it helps increase total income and reduce income inequality One example is biotechnology implementation in agriculture With better biotechnology, crops give more yield and have better quality Therefore, it helps increase farmer income for each harvest season

Technologies could also potentially open many business opportunities When introduced to the market, technologies could create new economic branches and demands for labor (Vivarelli, 2012) This effect has the potential to reduce unemployment and reduce income inequality Technologies could also help expand the potential market of business The development of E-commerce could potentially raise the income of farmers and local businesses by enabling them to sell their products to new markets Taobao villages in

to generate income One good example is the Solar Home Systems program in Bangladesh, which uses solar technology to provide electricity for its residents The program enabled one-quarter of the population in unelectrified rural to obtain electricity and enabled electricity to 200,000 rural businesses and religious facilities (Cabraal et al., 2021) Access

to electricity has enabled the population in Bangladesh to access information and online education through ICT and increase the capability of local businesses The program helps alleviate the inequality situation in Bangladesh

Overall, technological changes could potentially reduce income inequality Technological changes could reduce income inequality by providing new ways and methods for everyone

to improve themselves and their business

3.3 Other factors affect income inequality

3.3.1 Education

Education is one of the many factors affecting income inequality The level of education index help reflects the quality of the workforce in the country Acemoglu & Autor, 2011 found that people have a higher chance of increasing their income with higher education Cornia & Kiiski (2001) also found that higher educational achievement and equal

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education opportunity could reduce income inequality However, other researchers found that the relationship between education development and inequality is an inverted U-shape (Eicher & Garcia-Penalosa, 2000; Bouillon, Legovini & Lustig, 2001) Increasing education leads to income inequality because educational attainment is unequally distributed (Eicher & Garcia-Penalosa, 2000; Bouillon, Legovini & Lustig, 2001) Therefore the person with a higher level of education will have a higher income

3.3.2 Globalization

Globalization is one of the mạjor movements in the world Globalization opens the interaction and integration among people, companies, and governments worldwide This research will consider globalization to consist of two main processes, including open trade and open finance With globalization's opportunities, the income inequality situation becomes more complex

3.3.2.1 Trade openness

Trade openness describes countries' trade relations with the outside world on how free or strictly it is Barış, S (2019) Trade openness affects income inequality through the labor market of the country According to the Heckscher-Ohlin model and some of its modifications, trade openness could increase or reduce income inequality depending on the economy's nature (Jaumotte et al., 2013) Trade openness would increase their wages for the economy favoring low-skill workers, reducing the wage gap and increasing the economy's wage gap by favoring high-skill workers However, there is also evidence that trade openness and technological change create polarization in the labor market (Van Reenen, 2013)

Globalization also affects inequality through its impact on the economy Globalization causes a shift in the economic structure, increasing inequality (Alderson & Nielson, 2002) However, globalization also decreases the wage gap by creating new jobs, especially in the industrial sector (Mills, 2009) With the development of technology, globalization also

to financial resources for the poor, increasing their potential to increase their income However, the poor are also more exposed to financial crises with financial openness, and without a good institution, financial resources can only be accessed by the well-of Also, the inflow of FDI with technological change has a polarization effect on the labor market

The dependent variable is inequality, and the independent variable is technological changes, education, and globalization There will also be other control variables for the model The variable chosen for the model is based on Jaumotte et al (2013) model with some modifications Because the Jaumotte et al (2013) model aims at a broader problem, this research model is only based on some of the variables proposed by the authors The variables are simplified, and some use different data to calculate

LRatioi,t = α+ β1FOpen i,t + β1TOpen i,t + β2Tech i,t + β3Tech i,t-1 + β4Edu i,t + β5lagEdu i,t-1+

β6FDI i,t + β7GovS i,t + β8LCorrupt i,t + β9LGDPpc i,t

50% share provided by the World Inequality Database LRatio is used to represent the income inequality variable Using the logarithm of the income share ratio between the top 10% share and the bottom 50% share increases the statistical significance of the model and other variables compared with the ratio Using logarithm for the inequality variable was also used by Jaumotte et al (2013) and Mnif (2016)