Economic Complexity and Inequality: Does Regional Productive Structure Affect Income Inequality in Brazilian States?

Recent research on the effects of the productive structure of an economy has turned to examining whether economic complexity is associated with lower income inequality. In contrast to the commonly adopted approach that estimates the impact of economic complexity in a cross-country setting, we use panel data for Brazilian states to identify the relationship between economic complexity and income inequality at the sub-national level. Our findings show that the relationship between economic complexity and income inequality has an inverted U-shape, indicating that growing levels of complexity first worsen and then improve the income distribution in Brazilian states. Our findings also show that this relationship is particularly prominent in those states that have relatively high levels of urbanization and overall development. Furthermore, we identify separate effects on income inequality from the degree to which regional productive structures are characterised by diversity in terms of industries and occupations. These effects are particularly pronounced in less developed states with a more rural character. In combination, these findings confirm the important role that the productive structure plays in processes that drive improvements in income distributions and suggest that more research on this impact is warranted at the regional level.