Does Social Democracy Redistribute More in the Knowledge Economy?

The literature has long pointed out that the postindustrial transition to knowledge-intensive production may widen the pay gap between skilled and unskilled workers and impede redistribution by social democratic governments, especially to labor market outsiders. In this paper, I show that the impact of the knowledge economy on left governments may be more complicated. To do so, I differentiate between two margins of progress in knowledge acquisition, a decline in the cost of processing information and a decline in the cost of communicating information, and highlight their different implications for social democracy and redistribution. Using information technology data from up to 21 OECD countries, I show that while technological progress in processing information reduces the “skew” of earnings inequality in society and undermines redistribution by left governments, the progress in communicating information has the opposite effect, increasing “skew” and prompting social democracy to redistribute more, especially to labor market outsiders.