Does institutional quality moderate the human capital–inequality dynamics? Comparative evidence from LAC and SSA countries

Abstract

Aligning with Sustainable Development Goal 10, this study probes whether quality institutions matter in the drive towards reducing income inequality through human capital. An unbalanced panel data on the Gini index (measure of income inequality), human capital index and institutional quality index drawn across 83 Latin America and sub-Saharan African (SSA) countries from 2010 to 2019 is used. For the most part, the consensus is that the interaction of human capital and quality institutions significantly reduces income inequality. For context, inequality reduces by −7.810 and −21.30 points for the full and SSA samples. Other findings reveal that the interaction effect is consistently negative at upper quantiles. Evidence from the margin plots reveals that the effect of human capital on inequality improves as institutional quality is 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 for the full sample and in SSA. This is a novel contribution to the literature as it suggests that quality institutions matter in the drive towards reducing the menace of income inequality. Policy recommendations are discussed.