Effect of oil revenues on size and income of Iranian middle class

ABSTRACT This paper investigates the effect of oil revenues on the middle-class size and income in Iran. Following Kharas (2017. The unprecedented expansion of the global middle class: An update. The Brookings Institution), it uses an absolute measure to define the middle class as those who earn between US$11 and US$110 per day (2011 PPP). The study employs annual time series data for 1965–2017 and a Vector Autoregressive (VAR) model along with impulse response and variance decomposition analyses. Findings indicate that the response of the middle class to positive oil-income shocks in Iran is positive and significant. It is further shown that the channels of international non-oil trade, service sector, and overall economic development are important in understanding the relationship between the oil income and the middle class in Iran. These results are robust when controlling for other channels in the nexus of oil income and middle class as well as alternative definitions of middle-class income based on relative measures obtained from Iran’s income and expenditure household surveys.