Between 2007 and 2019, inequality within many EU countries increased, while inequality between countries declined. This column examines these seemingly contradictory trends, as well as the role played by market inequality and redistribution. Most of the progress has been driven by rising labour incomes in lower-income countries. Changes in employment, education, and demographics had a minor impact on reducing inequality. By more effectively targeting disadvantaged regions and vulnerable groups, cohesion policy can help counteract rising within-country inequality. A harmonised tax transfer system across countries or a more centralised fiscal framework can play a crucial role in shaping EU-wide inequality.
Income inequality is a widely discussed topic in many advanced economies. Since the mid-1980s, rising income inequality has been a defining trend in most of the countries that now form the EU (Förster and Tóth 2015). At the same time, the EU has built a reputation as a ‘convergence machine’ (Gill and Raiser 2012), fostering income convergence as newer and smaller economies have rapidly caught up with the founding members. As a result, Vacas Soriano (2024) highlights that income inequality at the EU level has declined significantly over the past 15 years due to strong convergence between member states. To reconcile the seemingly contradictory trends of rising within-country inequality and declining EU-level inequality, in a new paper we examine inequality between EU households as if they were living in a single entity and we analyse the role of market inequality alongside redistribution within and between EU countries from 2007 to 2019 (Filauro et al. 2025). Based on the evidence produced on EU-wide inequality, we further discuss the challenges ahead for EU policy in various areas that could influence inequality trends, including cohesion policy, social policy, and the common EU budget.
Why should we care about EU-level inequality?
Most studies so far have examined the factors driving inequality at the country level, with limited analysis from a pan-EU perspective. However, the study of income inequality at the EU level is gaining importance as it is documented in various columns (Blanchet and Gethin 2019, Fischer and Filauro 2021, Vacas Soriano 2024). The two main reasons for such an interest are: firstly, the supranational perspective is becoming more relevant as the EU is taking a more prominent role in setting guidelines for current economic and social policies, with potential for more ambitious antipoverty action (Huguenot-Noel and Andor 2021). Even though taxes and transfers remain mostly an exclusive competence of member states, the EU is increasingly coordinating labour and social policies capable of reducing income inequality. Recent examples include the EU directive on adequate minimum wages to the latest call by the European Commission to set forward an official European Anti-Poverty Strategy in Ursula von der Leyen’s second term. Second, there are instrumental reasons for studying changes in EU-wide inequality. Rising inequality at the supranational level should be a concern for policymakers as it can erode social cohesion, foster lack of cooperation between member states, exacerbate political polarisation, and jeopardise economic growth (Milanovic 2010).
Inequality reduction and convergence between countries
Our findings reveal a notable decline in EU-wide income inequality between 2007 and 2019. For instance, the Gini coefficient for the working-age population decreased by over three percentage points from 36.2% to 33% (9% reduction). Most importantly, we find that this reduction is primarily driven by between-country convergence in pre-tax and transfer incomes, supporting the thesis of the convergence machine with lower-income member states catching up to wealthier counterparts and that this happens despite increasing income inequality within several individual member states (Figure 1).
Figure 1 Inequality in the EU: Decomposition by country, post-tax/transfer income
The evidence of this change can be better visualised through a growth incidence curve (Figure 2). The post-tax/transfer income of the 25th percentile grew by 15%, outpacing growth at higher points in the distribution. This large variation points to a possibility of different growth patterns in various EU countries located at different points of the EU income distribution. Figure 3 clearly illustrates this as it is evident that newer member states (for example members of the former eastern bloc) are more widely dispersed throughout the EU’s income distribution in 2019 compared to being limited to the bottom percentiles in 2007.
Figure 2 Growth incidence curve in the EU, 2007 to 2019, post-tax/transfer income
Figure 3 EU income distribution by country, 2007 (top) and 2019 (bottom): Post-tax/transfer income
What explains this decline in EU-wide inequality?
The drivers of this decreasing inequality seem to stem mainly from increasingly similar mean post-tax/transfer incomes that could result from two distinct processes: a more redistributive welfare system or convergence in labour market incomes. Historical evidence suggests that the latter is likely the case but to test this hypothesis we apply decomposition techniques to determine how much of the change in inequality is driven by differences in labour market incomes across countries versus the impact of national tax and welfare systems.
We also find that changes in market incomes with the equalising impact of between-country market incomes offsetting dis-equalising changes in the tax-transfer systems, reinforcing the narrative of a ‘convergence machine’ at least in market income terms, while transfers turn out to have been more redistributive in 2007 compared to 2019.
Moreover, changes in employment, education, and demographics had only a minor impact on reducing inequality, with most progress driven by rising labour incomes in lower-income countries. Finally, we measure the impact of changes in socio-demographic characteristics and find that they have had limited effect with regard to reducing EU market inequality (contributing to just 8.5% of the total). This points toward the fact that rising employment, labour market participation, and changing educational levels had only marginal impacts on EU-level market income inequality in the 12 years of our analysis, while the results were mostly driven by greater and more equal average labour incomes across countries.
What can we learn from these underlying trends? Suggestions for policy
The EU’s reputation as a ‘convergence machine’ is tested not only by economic output (GDP) but also by income inequality. Between 2007 and 2019, the distribution of market income at the EU level became significantly more equal, yet tax and transfer systems did not become more uniformly redistributive across countries.
At the same time, declining inequality in the EU as a whole has coexisted with stagnant or rising income inequality within member states. This dual challenge – sustaining convergence between countries while addressing rising domestic inequalities – highlights the critical role of future EU cohesion policy. Our findings show that while the EU has successfully reduced income disparities across member states, domestic inequalities remain a persistent and growing concern. If left unaddressed, these trends risk undermining social cohesion, fuelling political polarisation, and threatening the European project itself. By more effectively targeting disadvantaged regions and vulnerable groups, cohesion policy can help counteract rising within-country inequality.
Looking ahead, it is also crucial to assess how these trends have evolved beyond our period of analysis. Early evidence from the COVID-19 pandemic (Almeida et al. 2021) suggests that income inequality did not increase as sharply as during the 2008 financial crisis, thanks to large-scale interventions such as the Support to Mitigate Unemployment Risks in an Emergency (SURE) initiative. Future trends in EU income inequality will be shaped by multiple factors, including continued economic convergence between newer and founding member states. However, the lack of a fully integrated European tax-benefit system limits the EU’s ability to address inequality directly, leaving it reliant on coordination and policy harmonisation among member states. Whether tax-transfer systems become more harmonised, or a more centralised fiscal framework emerges under the new Commission remains uncertain, yet these decisions will likely play a crucial role in shaping EU-wide inequality in the coming years.
Source : VOXeu
