The Effect of Human Capital on Income Equality: Cross-sectional Analysis

Abstract

ABSTRACT The objective of this study is to investigate the effect of human capital on equality of income distribution. To this end, we use cross-sectional data analysis on a sample consisting of 89 countries with data in 2018. We construct an equation of income equality and next empirically estimate that equation. Human capital is proxied by gross enrolment rate of tertiary education whereas income equality is proxy by the ratio of the income share held by the lowest 10% (of the population) to the income share held by the highest 10% (of the population). In order to control the development level of countries, we added per capita income and its squared term into the equation. Moreover, the variables of technological development, openness and unemployment were added into the equation to control other factors such as demand- and supply-side. The results suggest strong evidence towards significant and positive effect of human capital on income equality. As policy implication, it is strongly recommended to encourage individuals to invest their education level, as the results indicate that countries with a high stock of human capital experience higher level of income equality. In addition, raising the trade volume, increasing the share of research and development expenditures in GDP, and promoting policies to reduce the unemployment rate are other substantial outputs of our empirical analysis.