The continuous expansion of income disparities poses serious threats to sustainable socioeconomic development. Concurrently, as a key driver of technological advancement, the influence of innovation on shaping income inequality trends has been extensively debated. This study employs panel structural vector autoregression to examine the complex effects of innovation on income inequality using panel data from 59 countries spanning 1995–2021. The two-stage empirical analysis reveals that innovation shocks negatively affect income inequality in developed countries while positively impacting it in developing countries. Further qualitative investigations indicate that differences in developed and developing countries’ institutional guarantees may be a key reason for this distinction. We also determine that innovation only accounts for a small proportion (≤8 %) of the causes of income inequality changes in either case, and fluctuations in and solidification of income distribution patterns are the most significant influences within the scope of this study. Recommendations include strengthening institutional guarantees to ensure equitable distribution of innovation benefits, enhancing educational attainment, and promoting targeted skills training programs to bridge workforce skills gaps. By addressing these issues, policymakers can develop more effective strategies to balance the pursuit of innovation and the imperative goal of improving income distribution.