Investigating the Role of Human Capital and Shadow Economy in the Impact of Natural Resource Rent on Income Inequality with Regime Change

Abstract

Income inequality is a major problem in most countries, particularly the underdeveloped world. Unequal distribution of income weakens the achievement of sustainable global economic growth and acts as an impasse to achieve the goals of sustainable development, including the reduction of poverty and hunger in the world. One of the most important factors affecting income inequality is the rent of natural resources, which can have different effects depending on the way natural resources are used. This study was conducted to investigate the effect of natural resource rent on income inequality, taking into account the role of the shadow economy and the human capital index. For this purpose, the annual data of 1971-2020 and the Markov-switching method were used. The results show that natural resources have a positive and significant effect on income inequality; furthermore, the relationship of shadow economy with income inequality in both regimes (low and high levels of inequality is significantly positive, and the effect of human capital on income inequality in both regimes is negative and significant. This study is presented with recommendations to politicians to promote the legalization of undeclared economic activities and reduce dependence on natural resources as mechanisms to reduce the structural problem of income inequality.

Keywords

• markov-switching
• shadow economy
• income inequality
• human capital
• natural resources rent