Unequal unions? A comparative decomposition of income inequality in the European Union and United States

Abstract

This study applies improved household income data to measure and decompose trends in pan-European income inequality from 2006 to 2014. To contrast the relative significance of economic homogeneity versus the efficacy of welfare state and labour market institutions in shaping income distributions, we compare the structure of inequality in the 28 Member States of the European Union (EU-28) to that of the 50 United States. This comparison stands in contrast to the standard practice of evaluating the United States against individual EU Member States. Despite the greater relative heterogeneity of the EU-28 and our corrections for the underreporting of household income in the United States, post-fisc income inequality in the EU-28 remains lower than that of the United States from 2006 onward. Moreover, inequality appears to be rising in the United States, while it has remained stagnant since 2008 in the EU-28. In both unions, and particularly the United States, within-state income differences contribute more to union-wide inequality than between-state differences. In a counterfactual analysis, we find that if the EU-28 matched the between-state homogeneity of the United States, but maintained its relative within-country inequalities, pan-European inequality would fall by only 20 percent. Conversely, inequality in the United States would fall by 34 percent if it matched the within-country inequality of the EU-28. Our findings suggest that the strengthening of egalitarian institutions within the 28 Member States is more consequential than economic convergence in reducing pan-European income inequality. We highlight institutional challenges towards achieving a ‘more equal’ Europe and discuss implications for future EU policymaking.