Income inequality has become a significant concern globally. While public policies aim to stimulate innovation, the impact of redistribution on innovation remains debated. Climate change further complicates this, potentially exacerbating inequalities and requiring strategies to protect low-income groups. The circular economy (CE) and human development (HD) offer potential solutions, but their integration needs further exploration. This study addresses this gap by examining the relationships between income inequality, R&D potential, and HDI in EU countries with varying levels of CE adoption. The goal is to quantify these relationships and provide insights for policymakers to promote innovative and sustainable development that benefits all segments of society.

Existing research explores the complex relationship between income inequality, innovation, and economic development. Studies show mixed results on the impact of income redistribution on innovation, some suggesting negative effects on incentives, while others find no significant negative impact. The role of R&D spending on innovation is widely acknowledged, although not all R&D translates to effective innovation. Furthermore, research highlights the ambiguous effects of income inequality on environmental innovations and sustainable development, with some studies indicating that lower inequality promotes green technological advancements. The literature emphasizes the need for further research, especially in examining the interplay between CE and HD and their relationship with income inequality and innovation across countries with varying CE adoption levels.

This study employed a two-stage analytical process. First, cluster analysis grouped EU countries (n=27) based on two CE indicators: (i) the number of patents related to recycling and secondary raw materials, and (ii) the circular material use rate. Data from 2010-2020 was obtained from Eurostat and the United Nations Development Program. The analysis incorporated several variables: income level (standardized average of 13 annual income categories), eight R&D indicators (number of employees and gross domestic expenditure on R&D, disaggregated by sector: business enterprise, government, higher education, and private non-profit), and HDI. Second, panel regression analysis, using the fixed effects model (for significant Hausman test results), and the random effects model (otherwise), evaluated the relationships between income and R&D potential, and between R&D potential and HDI separately for each cluster. Heteroscedasticity was addressed using the White estimator in the random effects model and the Arellano estimator in the fixed effects model. Statistical analyses were conducted using R.

Cluster analysis divided EU countries into two groups: Cluster 1 (higher CE adoption) and Cluster 2 (lower CE adoption). Panel regression analysis revealed significant positive relationships between income level and R&D indicators in most cases, particularly in Cluster 1. In Cluster 1, the strongest relationships were observed between income and R&D indicators in the Business enterprise and Higher education sectors. However, the government R&D sector showed insignificant relationships with income in both clusters. Regarding the relationship between R&D potential and HDI, significant positive relationships were also observed, with particularly strong connections found in the Private non-profit sector for Cluster 1. In Cluster 2, the Business enterprise sector showed the strongest connection with HDI. Robustness checks confirmed the consistency of the findings across the entire sample of countries.

The findings indicate a strong positive association between income and R&D potential, particularly in countries with high CE adoption. This suggests that higher income levels foster R&D activity, especially in the Business enterprise and Higher education sectors. However, the insignificant relationship between income and government R&D raises concerns about potential inefficiencies in the public sector. The positive correlation between R&D potential and HDI underscores the importance of R&D in driving economic development, with the Private non-profit sector playing a prominent role in countries with higher CE adoption, while the Business enterprise sector is more critical in countries with lower CE adoption. This highlights the sectoral specificities of R&D and their impact on economic development.

This study reveals the importance of R&D for well-being and sustainable development in the EU, particularly emphasizing the Business enterprise sector. A well-being economy necessitates shifting policy focus beyond GDP growth towards human and environmental well-being. The results highlight the need for increased investment in R&D, especially in sectors demonstrating a strong correlation with income and HDI, and the importance of fostering innovation and collaborations among different stakeholders. Future research should delve deeper into the inefficiencies of the government R&D sector and examine the microeconomic factors influencing R&D investment and employment.

The study's limitations include missing data points in the Eurostat database for certain variables, especially related to the Private non-profit sector. This might affect the interpretation of results. Future research should aim to improve data quality and explore more comprehensive methodologies to account for sectoral variations and national contexts. The study also focuses solely on EU countries, limiting the generalizability of the findings to other regions.