Structural determinants of income inequality in the European Union: evidence from panel analysis

Understanding the reasons underlying income inequality has been the aim of much research in recent years. However, there are few structural investigations of the effects of the forces shaping the evolution of income inequality specifically between advanced economies. This paper proposes a theoretical framework of the factors affecting income distribution in a particular set of advanced economies, namely those of the European Union, and utilizes a fifteen-year panel (1995-2010) of 25 countries to identify the effects of several structural determinants of household income inequality. Our empirical analysis shows that families with children, shares of housing owners paying a loan, social mobility and labour markets institutions are the main structural determinants of income inequality in the EU. Also significant are the effects of economic growth and social spending for both monetary transfers and universal services. The paper concludes by providing some policy indications based on these main findings.