The Convergence of the Middle Class. New evidence for Europe
Derndorfer, Judith and Kranzinger, Stefan (2017) The Convergence of the Middle Class. New evidence for Europe. INEQ Working Paper Series, 7. WU Vienna University of Economics and Business, Vienna.
We analyse how the size of the middle class has evolved in 26 European countries between 2004 and 2013. With data from the European Survey on Income and Living Conditions (EU-SILC), we define households with a median equivalised disposable household income between 75% and 125% to be middle class. We find that in 16 out of 26 countries the middle class decreases and identify an increase in income polarization in all these countries, with the exception of Greece. We examine whether changes regarding the middle class can be attributed to changing household structure, unemployment rates or redistributive policies. Our results suggest that redistributive policies are most influential for explaining the change across country groups, whereas the other factors do not seem to have an impact. However, there is a great variation between countries. Due to government transfers and taxes, middle class increased 17 percentage points in Iceland, while only by 5.3 percentage points in Estonia. Exploring potential explanations for this gap, we define country groups with similar socio-economic policies and institutions. We observe that Social-Democratic countries and Central European economies have the biggest, while Baltic and Mediterranean countries show the smallest middle class. Analysing the impact of redistributive policies we find considerable differences between country groups and can show that liberal market economies do most, whereas Baltic countries do least for their middle class.