Is a strong middle class the secret to high levels of human development?
Many countries today experience increasing or persistent income inequality, a major concern for citizens and politicians alike. This concern is justified; as some individuals get richer, most people’s real incomes stagnate. Widening income inequality brings challenges to a nation’s development prospects. These challenges need to be more well understood for a better policy response.
In our recent WIDER Working Paper written for the @EQUAL research project, we study the impact of income inequality on different dimensions of human development, such as education levels, health, and economic well-being (i.e., income per capita). Using panel data for more than 145 countries worldwide with information on the income distribution at the country level (from the World Income Inequality Database or WIID) and different components of human development (as measured by the Human Development Index or HDI), we show that human development tends to be lower when inequality is higher. There is a strong negative correlation between inequality and human development, whether we measure inequality using the Gini index or with other measures, such as the income shares of the top 1% or 10%, or the bottom 40% (see Figure 1).
Figure 1: Human Development Index scores and different measures of inequality
The graphs in Figure 1 also suggest that this association is mainly driven by country averages, meaning that there seems to exist a long-term positive association between low inequality and human development performance—countries with higher inequality tend to have lower human development.
Small or stagnant income shares to the Middle 50% hurt development
Another added value of this research is that we take advantage of detailed distributive data consistent across countries and over time from the WIID Companion datasets, complemented with other sources to have a more precise picture of the top of the income distribution. These standardized income distributions allow us to focus on the differential effect associated with the concentration of national income at different parts of the income distribution, like the bottom, middle, and top.
Does human development always increase as inequality declines? When it comes to understanding the dynamics of the within-country trends over time, the story becomes more nuanced. We find evidence that it is mainly the concentration of income at both the bottom and the top of the distribution, rather than overall or average levels of inequality, that is associated with lower levels of human development. Another way to say this is that when the share of national income going to the middle 50% is smaller, human development tends to be lower. This result highlights the relevance of income shares that go to the middle of the income distribution, and the important role that strong middle-income groups play in the development process.
Noticeably, there is also a large heterogeneity in these results between developed and developing countries, and by the dimension of human development, that needs to be explored. Indeed, the results show that in middle- and low-income countries, the impact of a higher concentration of income at the middle acts mainly through higher human capital accumulation (enabling more years of schooling on average). And in high-income countries, that higher concentration of income in the middle is more positively associated with better life expectancy (or a healthier population).
These results have policy implications, as they reinforce the need to fight inequality in both developed and developing countries. Policymakers concerned with human development should worry about the distributional dynamics in their countries, particularly high levels of income concentration at the top of the distribution. This concentration can deter higher health and education achievements integral to human development in rich and poor countries alike, where it seems that income growth for middle-income groups can play a key role.
David Castells-Quintana is professor of Applied Economics at the Autonomous University of Barcelona (UAB).
Carlos Gradin is professor of Applied Economics at the University of Vigo.
Vicente Royuela is professor of Applied Economics at the University of Barcelona (UB).
The views expressed in this piece are those of the authors, and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.