Income Inequality, Human Capital and Institutional Quality in Sub-Saharan Africa

Abstract

This paper aligns with Sustainable Development Goal 10 to investigate the role of quality institutions in the human capital-income inequality nexus. It uses an unbalanced panel data on the Gini index (measure of income inequality), human capital index and institutional quality index on 46 sub-Saharan African countries from 2010 to 2019. The Driscoll and Kraay (Rev Econ Stat 80:549–560, 1998) panel spatial correlation consistent (PSCC) and Firpo et al. (Unconditional quantile regressions. National Bureau of Economic Research Working Paper, No. 339, pp 1–54, 2007. https://doi.org/10.3982/ECTA6822) bootstrap unconditional quantile regression (UQR) techniques are deployed. Among others, findings reveal that: (1) human capital and institutions aggravate inequality; (2) the interaction of human capital and institution reduce inequality; (3) UQR reveals that the interaction effect is negative at lower quantiles of 0.10, 0.25 and 0.50; and (4) results across the sub-regions are mixed. In addition, evidence from the margin plots reveals that the conditional effect of human capital on income inequality is negative as institutions are strengthened. The downward trend of the plot within the 95% confidence interval shows that institutional quality enhances the impact of human capital on income inequality. These are novel contributions to the literature as it suggests that quality institutions matter in the drive towards reducing the menace of income inequality. Policy recommendations include strengthening institutions and making basic education affordable.