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Heterogeneous impact of natural resources on income inequality: The role of the shadow economy and human capital index

Abstract:

The stylized facts show that natural resource prices are highly volatile. The immediate consequences of such volatility are changes in the labor force's income distribution and public spending. In this context, this research aims to examine the impact of natural resource rents on inequality, including the role of the shadow economy and the human capital index. We use annual data and second-generation panel data cointegration techniques to correct potential bias caused by slope heterogeneity and cross-section dependence. We found that natural resources have a heterogeneous impact on income inequality between countries. The cointegration results indicate a long-run equilibrium relationship among the four series in high, low-middle, and low-income countries. Likewise, natural resource rents and inequality have a one-way causal relationship in lower-middle-income countries. Income inequality causes the shadow economy in most groups of countries. Our results show that countries with the highest income dependence on natural resources have higher income inequality levels. Our research contributes to the debate on income inequality sources and the structural mechanisms that guide public policies to achieve Sustainable Development Goal 10. The article ends with a call for politicians to promote the legalization of undeclared economic activities and reduce dependence on natural resources as mechanisms to mitigate the structural problem of income inequality.