Dynamics of inequality and growth in Europe: may spatial models solve the puzzle?

The link between income inequality and economic growth remains poorly understood. The global economic crisis challenged numerous growth studies by highlighting considerable degrees of spatial interdependence among economies. The existence of fewer restrictions on factor movements prompted spatial redistributions of income inequalities. Our paper attempts to reestimate such inequality impacts across the EU by allowing for these redistributions. We employ the spatial Durbin error specification, and unlike other studies, we make statistical inferences along the lines of a welfare-adjusted production function. Our results lend support to the presence of spillover effects emanating from income redistribution larger than those from unemployment, knowledge, or human capital.