The moderating role of human capital in the effect of economic complexity on income inequality

Abstract

Abstract Purpose This study examines the impact of economic complexity on income inequality and investigates whether this relationship is moderated by human capital across countries with different levels of economic complexity. Methodology Using panel data for 40 countries (2012–2024), the sample is split into the 20 most and 20 least economically complex economies based on each country’s average ECI score. The study applies dynamic panel GMM (difference GMM) to address persistence and endogeneity, with Hansen and AR(2) tests confirming model validity. Human capital is included via an interaction term to capture its moderating effect. Key findings Results reveal heterogeneous effects. Economic complexity increases income inequality in the full sample and in low-complexity economies but reduces inequality in high-complexity economies. This finding suggests that the equalizing effect of economic complexity emerges only after countries reach a certain level of economic complexity. The moderating role of human capital also varies across country groups. In the full sample and in low-complexity economies, human capital weakens the inequality-increasing effect of economic complexity. By contrast, in high-complexity economies, it reduces the inequality-reducing effect of economic complexity, indicating that the gains from higher skills are captured mainly by already highly skilled groups. Overall, the effects of economic complexity and human capital on income distribution depend on countries’ structural characteristics. Implications and value This study extends the literature by showing that the relationship between economic complexity, human capital, and income inequality is not uniform across countries. It highlights the importance of accounting for structural heterogeneity when examining the distributional consequences of economic complexity. The findings also provide cross-country evidence to support structural transformation policies tailored to different stages of development, thereby contributing to the achievement of Sustainable Development Goal 10 on reducing inequalities.