Growth and inequality in the EU

The concern here is to analyse the effect of economic growth on the distribution of income in EU Member States. The paper reviews relevant empirical studies which have been carried out into this relationship over recent years and examines the experience across the European Union over the first half of the present decade, investigating in particular the different channels by which growth can affect income distribution, focusing its effect on employment and household circumstances as well as on the dispersion of earnings, which has tended to be the primary centre of attention of recent research. The research note also reports empirical results on the different channels by which growth seems to have affected different aspects of inequality in EU countries during the first half of the present decade. The analysis indicates that there is no simple relationship between growth and inequality in the countries examined. Inequality of labour earnings has increased in both relatively high growth and low growth countries, though less in the former than the latter, and examples of declining inequality was also found in both country groups. On the other hand, results show that the direct effect of employment growth in reducing inequality is more straight-forward. In countries where economic growth gives rise to an increase of the employment rate, inequality of labour income among those of working age tends to decline. Increasing employment tends also to reduce the proportion of those living in workless households, so contributing to a more equitable distribution of employment and labour income between households. This Policy Brief / Research Note has been produced for the European Commission by the Social Inclusion and Income Distribution network of the European Observatory on the Social Situation and Demography. The views expressed are those of the authors and do not necessarily represent those of the European Commission.