Inflation and income inequality: does human capital development matter?

Gift Mbewe (), Yanzhi Zhao () and Chuanzhong Tang ()
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Gift Mbewe: Dongbei University of Finance and Economics
Yanzhi Zhao: Dongbei University of Finance and Economics
Chuanzhong Tang: Dongbei University of Finance and Economics, International Business College

SN Business & Economics, 2025, vol. 5, issue 9, 1-21

Abstract: Abstract We use a panel dataset of 131 countries covering 1974–2022 to examine how human capital development affects the relationship between inflation and income inequality. We employ a two-step System Generalized Method of Moments (GMM) to address endogeneity and dynamics, alongside the (Driscoll JC, Kraay AC (1998) Consistent covariance matrix Estimation with spatially dependent panel data. Rev Econ Stat 80(4):549–560) approach to correct for cross-sectional dependence, heteroskedasticity, and autocorrelation. The results show that inflation significantly increases income inequality and reduces the income share of the bottom 20% and 40% of the population. We also find nonlinear effects with an inverted U-shaped relationship between inflation and income inequality. The interaction between inflation and human capital development significantly reduces income inequality. These findings highlight the critical role of human capital development in reducing inequality, particularly in the context of high inflation. The policy implications include promoting investment in human capital to create a population resilient to inflation.

Keywords: Inflation; Income inequality; Human capital; System GMM; D31; E21; J11 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s43546-025-00900-0

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