Human Capital and Income Inequality in Developing Countries: New Evidence using the Gini Coefficient

Abstract

This paper examines the effect of human capital inequality on income inequality in developing countries using the Gini coefficient as a consistent measurement for both inequalities. This paper also adds a few control variables such as the Globalization Index, GDP per capita, and the total population using the dynamic panel data two-Step System Generalized Method of Moment (GMM) for 55 countries over the period of 1970-2010. The empirical results show that human capital inequality has a significant positive effect on income inequality. This result is similar to the theoretical framework, where human capital and income inequality are positively correlated. However, other control variables such as Global and total population are insignificant with income inequality except for GDP per capita at 5 and 10 percent levels. Thus, in order to reduce income inequality and to give citizens equal opportunities, governments of developed and developing countries and policymakers need to minimize human capital inequality.