Income inequality, welfare regimes and the great recession

Has the Great Recession led to a change in income inequality within European countries? Jenkins (2012) and current country-case studies do not find a significant change for the period 2007-2010. However, recovery has not proven to be sustainable by then, as many Eurozone countries dipped into a second recession in 2012. We conduct a cross-sectional event study on the distribution of disposable income. In line with the literature we do not find a change in inequality during the early phase of the Great Recession. When including the period 2010-2015 we find a tentative increase in the ratio of the ninth to the first decile of disposable income (d9/d1 ratio), as well as for the d5/d1 ratio, for the 29 European countries on average. In order to explain the heterogeneity of the change in inequality across countries we group the European countries into 6 welfare regimes. The southern European and the post-socialist corporatist regime is positively associated with the mid-term change in inequality. Thus inequality behaves counter-cyclically in southern European countries, which is in line with literature. However, the business cycle behaviour of inequality in the other welfare regimes is rather acyclical. Eurozone members experience by 2 to 4 % stronger growth in inequality, according to the d9/d1, the d5/d1 and the Gini coefficient. Ethnolinguistic fractionalization is positively associated with the mid-term change in the d9/d1 ratio. These results are policy relevant as they address both equity and efficiency concerns.
by Lukas Rainer
Masterarbeit Universität Innsbruck 2017