Income inequality in the EU: General trends and policy implications

Stefano Filauro, Georg Fischer 17 April 2021

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There is growing interest in income inequality in Europe among both researchers and policymakers. Traditionally, inequality has been analysed either at the level of individual countries or in terms of the average of country trends across EU.1 While country trends remain an important focus, attention at the EU level is changing from the average view to inequality between all EU individuals across the individual countries. This means looking at the EU as an entity, similar to what is done for countries like the US, Canada, or Australia, which combine economic and political integration with considerable federal-state interaction.

While the EU is not a federal state, there is growing recognition that economic and social progress in each member state depends on developments in others and on the way EU-level institutions and policies impact inequality in each member state. All EU countries share a Single Market and most share a common currency. This creates an economic space in which economic forces act across the whole territory of the union with differential implications for the income of wage earners, enterprises, and capital owners, not only in each country but also at regional level. The global financial crisis and the sovereign debt crisis have been a marking experience and divergence in social and income trends has become a massive concern, demanding action at both the EU level and the national level (Buti and Pichelmann 2017, European Commission 2017, Von der Leyen 2019). Moreover, levels and trends of EU-level income inequality are likely to influence trust in the EU institutions and the mobility decisions of its citizens (Milanovic 2010).

EU-level inequality is the combination of inequality within and between its member states. Individuals’ positions in the EU distribution are determined by the position in one’s national distribution and the position of his or her country in the EU distribution. In comparison to the US, the EU is well-known to have lower inequality levels within its member states combined with higher levels of income inequality between them. This is consequential to the formation of the EU where countries with heterogeneous income levels have joined the Union along the way since its foundation. 

In this respect, the analysis of EU-level inequality is relevant to better identify the best level of government to tackle Union-level income inequality. If the main source of inequality is within countries, the role of supranational authorities is to coordinate and influence market or tax-benefit policies with large potential to reduce within-country inequalities. In order to reduce between-country inequality resulting from different starting points, the role of the EU is mainly to bolster convergence policies or redistribution mechanisms, such as the EU cohesion policies. In this respect, EU policy makers need to be aware of the impact of EU integration on the income of socio-economic groups at the EU, country, and sub-national level. The new EU instruments, Support to mitigate Unemployment Risks in an Emergency (SURE) and the Recovery and Resilience Facility respond to this challenge as does the initiative on minimum wages and collective bargaining (European Commission 2020a). 

Albeit imperfect, EU income survey data are a powerful source to monitor inequality trends.2 The main instrument is the Statistics on Income and Living Conditions (EU-SILC), an annual dataset that collects harmonised information on income and living conditions across EU countries and allows us to analyse EU-level income inequality trends. 

How does the EU-level inequality measure compare within the EU and internationally?

EU-level inequality in disposable incomes, as measured by the Gini coefficient, is slightly below the inequality observed in the most unequal member states such as Bulgaria and Lithuania (Figure 1). The general trend shows that income inequality has slightly declined as of 2016, after a general constant trend since the 2009 economic crisis, as documented in Commission’s publications (European Commission 2019, 2020b).

Figure 1 Income inequality in the EU in comparison to the most equal (top) and most unequal (bottom) member states (Gini coefficient, disposable incomes)

Source: EU-SILC data.
Notes: Year refers to incomes of the previous year. Incomes corrected for purchasing power parities. Data unavailable for Croatia (2007, 2008), Malta (2007), Italy (2019) and Ireland (2019).

The international comparison illustrates that EU-level income inequality is slightly higher than in countries with established welfare models, such as Australia and Japan. Perhaps more telling is the comparison with the US. Despite being the result of the aggregation of countries with heterogeneous income levels and within-country inequality, with Sweden and Bulgaria at the two extremes, disposable income inequality among EU individuals stands significantly lower than among US individuals (Figure 2). Moreover, the two trends appear to be diverging as income inequality seems to be declining in the EU as opposed to the US, especially in the recovery years from 2010 onwards. 

Figure 2 Income inequality in the EU in comparison to other countries (Gini coefficient, disposable incomes)

Source: EU-SILC data
Notes: Year refers to incomes of the previous year for the EU, current incomes elsewhere. Incomes corrected for purchasing power parities. Data unavailable for Croatia (2007, 2008), Malta (2007), Italy (2019) and Ireland (2019). OECD data for USA, Australia and Japan.

The inequality structure is the combination of within-country and between-country inequality. In 2018, around 80% of the EU inequality depended on within-country inequality while 20% could be attributed to income differences between EU member states (Figure 3).

Figure 3 EU inequality decomposition by country (Theil index, disposable incomes)

Source: EU-SILC data
Notes: Year refers to incomes of the previous year. Incomes corrected for purchasing power parities. Data unavailable for Croatia (2007, 2008), Malta (2007), Italy (2019) and Ireland (2019).

A closer look at the between-country inequality absolute trend shows its steady decline since 2007 (Figure 4). It is important to note, however, that convergence in national average incomes has essentially been owing to EU12 enlargement economies catching up vis-à-vis stagnating (or even declining) average incomes in southern member states (Bughin and Pissarides 2019, Cseres-Gergely and Kvedaras 2019, European Commission 2020b, Brandolini and Rosolia 2021). Hence, within-country inequality is where most should be done to tackle EU-level inequality. On the other hand, if inequality between member states were eliminated as a result of a convergence process between EU countries, EU inequality would decline by 20%. This is not a negligible fraction, especially in comparison to the US, where only 1% of total inequality is due to income differences between the 50 US states (Filauro and Parolin 2019, Blanchet et al. 2019).

Figure 4 Between-country inequality in the EU and euro area (Theil index and Mean Logarithmic deviation, Disposable incomes)

Source: EU-SILC data
Notes: Year refers to incomes of the previous year. Incomes corrected for purchasing power parities. Data unavailable for Croatia (2007, 2008), Malta (2007), Italy (2019) and Ireland (2019).

Unfortunately, the short-term outlook for EU inequality is rather grim. Between-country inequality is on the rise as the impact on employment incomes of the Covid lockdown measures is disproportionately affecting relatively poorer EU countries, where lower shares of jobs are amenable to remote working and/or tourism is a key sector. Within-country inequality too is expected to increase as lower-income groups such as the young, those on temporary contracts, and the low-paid self-employed are strongly affected by employment income losses in all member states (European Commission 2020c, 2020d). However, the outcome for within-country inequality trends will crucially depend on the ability of tax-benefit systems to cushion income loss along the income distribution. 

Market income inequality and redistribution

EU market incomes are relatively unequally distributed (Gini coefficient of around 54% in 2019) in comparison to the EU disposable incomes (Gini coefficient below 35% in 2019). Compared to the US, the overall impact of taxes and transfers, including public pensions, appear more strongly redistributive. As illustrated in Figure 5 (bottom panel), the overall inequality reduction from market to disposable income tops 35% in the EU, compared to around 23% in the US. An EU-US gap in the welfare redistributive effect also materialises when looking uniquely at the effect of transfers, including pensions (red versus yellow bars). However, these survey-based figures are likely to underestimate top market incomes more in the US than in the EU, so underrating the redistribution of the US tax benefit system, as demonstrated by Blanchet et al. (2020). 

The overall highly redistributive EU tax-benefit system depends on the relative position of national market incomes in the EU income distribution. The largest market incomes observed in the Nordic countries, Germany, or France are both at the top of the EU distribution and subject to larger relative reduction due to their pronouncedly progressive tax systems. Conversely, high market incomes in enlargement countries are subject to less progressive fiscal systems but they are not among the top market incomes in the EU distribution.3 Thus, the redistribution operated in higher-income EU countries explains a large part of the overall compression in the distribution of EU disposable incomes after taxes and transfers. 

Moreover, the EU redistributive impact measured in this way is influenced by the pension systems, as noted by Blanchet et al. (2020). Social transfers excluding pensions reduce inequality, as measured by the Gini index, by around 12% and the combination of social transfers and income taxes reduce it by slightly more than 20%. These figures are lower than the corresponding figures including public pension which range from 30%-35% for the EU. 

Figure 5 Inequality in market, gross and disposable income in the EU and the US. Gini coefficient (top) and Gini reduction (bottom, in %)

Source: EU-SILC data
Notes: Year refers to incomes of the previous year. Incomes corrected for purchasing power parities. Data unavailable for Croatia (2007, 2008), Malta (2007), Italy (2019) and Ireland (2019). OECD data for the USA.

Conclusion

The evidence provided here may be useful in identifying the most effective policy path to address inequality at the EU level. At the national level, inequality is determined by market-setting rules and institutions (such as collective bargaining), especially in the labour, capital, goods and service markets, and by the tax benefit system. On top of these policy areas, primarily in the remit of member states, EU-level inequality is influenced by EU income convergence and cohesion policies and by the wide range of EU Single Market and single currency rules and policies.

Looking at income inequality for the EU as an entity can be eye-opening to understand the potential of EU action and coordination of policies. So, the growing interest in regular monitoring of EU inequality trends and research is highly welcome.

Authors’ note:   The views expressed in this column are the private views of the authors and may not, under any circumstances, be interepreted as stating an official position of the European Commission.

References

Almeida V, S Barrios, M Christl, S De Poli, A Tumino and W van der Wielen (2020), "Households´ income and the cushioning effect of fiscal policy measures during the Great Lockdown", JRC Working Papers on Taxation and Structural Reforms No 06/2020, European Commission, Joint Research Centre, Seville. 

Blanchet, T, L Chancel and A Gethin (2019), “Forty years of inequality in Europe: Evidence from distributional national accounts”, VoxEU.org, 22 April. 

Blanchet, T, L Chancel and A Gethin (2020), “Why Is Europe More Equal Than the United States?”, WID.world, Working Paper 2020/19.

Brandolini, A and A Rosolia (2021), “The Distribution of Well-Being Among Europeans”, In Fischer, G. and Strauss R. (eds.), Europe's Income, Wealth, Consumption, and Inequality, Oxford University Press.  

Bughin, J and C Pissarides (2019), “Testing the resilience of Europe’s inclusive growth model”, VoxEU.org, 02 January. 

Buti, M and K Pichelmann (2017), "European integration and populism: addressing Dahrendorf’s quandary”, VoxEU.org, 22 February.

Cseres-Gergely, Z and V Kvedaras (2019), “Change and convergence of income distributions in the European Union during 2007-2014”, Working Papers 2019-13, Joint Research Centre, European Commission (Ispra site).

European Commission (2017), The European Pillar of Social Rights in 20 Principles.

European Commission (2019), “Main employment and social developments”, Chapter 1 in Employment and Social Developments in Europe (ESDE) 2019, Directorate-General for Employment, Social Affairs and Inclusion (DG EMPL), Brussels. 

European Commission (2020a), Proposal for a Directive of the European Parliament and of the Council on adequate minimum wages in the European Union.

European Commission (2020b), “Inclusive growth and solidarity in the EU: challenges, policy levers and the way forward”, Chapter 3 in Employment and Social Developments in Europe (ESDE) 2020, pp. 109-114. Directorate-General for Employment, Social Affairs and Inclusion (DG EMPL), Brussels.

European Commission (2020c), “Employment-income loss and wage compensation during the pandemic: preliminary estimates”, Part II in Employment and Social Developments in Europe – Quartely ESDE, December 2020. Directorate-General for Employment, Social Affairs and Inclusion (DG EMPL), Brussels.

European Commission (2020d), Labour Market and Wage Developments in Europe 2020. Publications Office of the European Union, Luxembourg.

Filauro, S and Z Parolin (2019), “Unequal unions? A comparative decomposition of income inequality in the European Union and United States”, Journal of European Social Policy 29(4): 545–563.

Fischer, G. and Strauss R.  (2021), Europe's Income, Wealth, Consumption, and Inequality, Oxford University Press.

Milanovic, B (2010), The haves and the have-nots: A brief and idiosyncratic history of global inequality, Basic Books (AZ).

Salverda, W (2021), “Can the European Union Contain and Improve Income Inequality?”, In Fischer, G and Strauss R  (eds.), Europe's Income, Wealth, Consumption, and Inequality. Oxford University Press.

Von der Leyen, U (2019), A Union that strives for more - My agenda for Europe, Political Guidelines for the next European Commission 2019-2024.

Endnotes

1 An extensive discussion of the two concepts of European inequality can be found in Fischer and Strauss (2021), especially in the thematic chapters by Brandolini & Rosolia and Salverda.

2 Blanchet et al. (2020) recently estimated pre-tax and post-tax income inequality in Europe and the redistributive impact of taxes and benefits with a powerful dataset that integrates survey data with tax data and national-accounts income components. However, this powerful data endeavour allows them to overcome survey limitations, their definition of Europe is not comparable to ours as it includes non-EU European countries. 

3 Note also that very top market incomes, poorly recorded in surveys, are growing rapidly in Eastern Member States as documented by Blanchet et al. (2020).

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Topics:  Europe's nations and regions Poverty and income inequality

Tags:  income inequality, EU, US, redistribution

Economist, European Commission

Senior Research Associate, Vienna Institute for International Economic Studies,

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