Abstract

The lecture examines the impact of oil revenues on the size and income of the middle class in Iran. Following Kharas (2017), an absolute measure is used to define the middle class as those earning between $11 and $110 per day (2011 PPP). The study uses annual time series data for the period 1965-2017 and a vector autoregressive (VAR) model along with impulse response and variance decomposition analyses. The results show that the response of the middle class to positive oil income shocks in Iran is positive and significant. It is also shown that the channels of international non-oil trade, services sector, and macroeconomic development are important in understanding the relationship between oil income and the middle class in Iran. These results are robust to other channels related to oil income and the middle class, as well as alternative definitions of middle-class income based on relative measures from the Iranian Household Income and Expenditure Surveys.