The Decomposition of Income Inequality in Europe
Kranzinger, Stefan (2018) The Decomposition of Income Inequality in the EU-28. INEQ Working Paper Series, 9. WU Vienna University of Economics and Business, Vienna.
Keywords and Classification
JEL-Classification D31, D33
What is the composition of income inequality in the EU-28?
What is the effect of government redistribution on income inequality in the EU-28?
What are the correlations between economic power and income inequality in Europe?
Which country groups show the lowest income inequality?
Decomposing income inequality in the EU-28 shows that between-country inequality contributes around 21.7%, whereas within-country inequality contributes 78.3% to the aggregated inequality in Europe.
Government redistribution at the national level reduces income inequality significantly but leads to an increase in the relative contribution of between-country inequality.
High income countries have lower income inequality, higher social expenditures and redistribute more than low income countries.
Clustering countries into groups with similar socio-economic policies and institutions reveals that Social-Democratic countries have the lowest income inequality and redistribute most, while the opposite holds true for Baltic countries.
Recently the social-economic divide increased in Europe which might endangers the European project. However, there is a lack of current research that provides results for policy implications to counteract this development. Therefore, this paper replicates the work of Beblo & Knaus (2001) and analyses the composition of income inequality for the EU- 28 in 2014 by using data from the European Survey on Income and Living Conditions in two steps. First, I apply the Theil index and additively decompose the sources of inequality into a within- and between-component by countries, country groups and demographic groups. Second, I analyse the impact of government redistribution on income inequality. The results show that inequality is highest for households with household heads older than 59 years and lowest for households with children. Moreover, high income countries have lower inequality, higher social expenditures and redistribute more than low income countries. On country group level, I illustrate that Social-Democratic countries have the lowest income inequality and redistribute most, while the opposite holds true for Baltic countries.