Digital finance, innovation resilience, and the wage income gap

Liu Yongbai Xiaoying Tang Rongsheng

Digital finance enabling scientific and technological innovation is an important way to promote industrial modernization, but it may lead to the widening of the wage income gap and bring negative effects to income distribution. Digital finance reduces the cost of financial participation and increases the density of access to financial services for innovative entrepreneurs, thus fostering more innovative entrepreneurs. The high innovation elasticity of digital finance leads to its tendency to increase the total factor productivity of modern sector and the wage income of modern sector in the long run, which leads to the widening of the wage income gap. This paper introduces the financial supply side with financial participation friction in multi-sector production, constructs an endogenous growth model of production-financial supply side, and discusses the wage income distribution effect of digital finance from the supply side channel. Theoretical analysis finds that the nature of wage income distribution in digital finance is related to the elasticity of digital financial innovation: When the innovation elasticity is higher than a certain threshold, the development of digital finance will expand the wage income gap, and when it is lower than the threshold, it will narrow the wage income gap. The model calibration results show that the innovation elasticity of China's digital finance is about 0.45, which is higher than the threshold of narrowing the wage income gap, which explains the reason why the inter-departmental wage income gap continues to expand with the development of China's digital finance in recent years. The quantitative simulation of the transformational dynamic nature of balanced growth economy finds that digital finance has only a short-term inclusive effect in narrowing the wage income gap, while widening the wage income gap has a long-term inequality effect. Therefore, the negative income distribution effect of digital finance needs to be paid attention to. This paper has important implications for the upgrading of digital financial development model and high-quality financial development under the goal of common prosperity.

Key words: Digital finance, innovation, flexible industry, modernization, wage income gap