Effect of Human Capital Investment on Income Inequality in Kenya

Abstract

Human capital investment has a crucial role in economic growth, and as such, it has been regarded as a significant aspect of government spending. The Gini index score reported an average of 41.6 percent in 2018, which is higher than the generally recognized perfect equality Gini index of 20%, suggesting that Kenya has been suffering from high income disparity. There has been a widespread belief that income inequality and human capital investment are mutually exclusive. The theoretical and empirical approaches in the literature provide mixed findings on the relationship. From 1990 to 2019, this study examined the effect of human capital investment on income inequality in Kenya while adjusting for interest rates and GDP per capita. The study adopted a causal research design to determine if a cause-and-effect association between the variables occurs. The time series data were subjected to diagnostic tests to ensure the presumptions of ordinary least squares held. Health expenditure was found to have a negative and statistically significant effect on income inequality after controlling for the interest rate and GDP per capita. After accounting for changes in interest rates and GDP per capita, the result shows that education investment has a negative and statistically insignificant effect on income inequality. The human development index was discovered to have a negative and statistically significant effect on disparity in income which was verified by the robust check. An inverted U was found using the Kuznets test, which was performed to broaden the scope of the research but yielded an insignificant result. The study recommends the formulation and implementation of policies that adhere to the Abuja Declaration on Health, which requires that 15% of government expenditure be allocated to health. The study recommends strict adherence to the 100% transition from primary to post-primary education. The study's conclusions are pertinent to the development and implementation of successful policies that encourage human capital investment, resulting in a decrease in Kenya's levels of income inequality.