Developments in income inequality and the middle class in the EU

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Authors

Abstract

This report provides a comprehensive examination of trends in income inequality within and between the EU Member States from 2006 to 2021. The study also aims to answer the related question of whether the middle class is becoming smaller because of developments in respect of disparities in household disposable income. A robust analysis is conducted using a wide range of interrelated indicators, including income inequality; income levels across Member States and along the income distribution; the size of the middle class; the share of national income received by different income groups; and poverty rates and other indicators of economic hardship experienced by European households. The role of public policies in explaining some of these trends is also examined. The results indicate that although income inequality has been relatively stable on average across the Member States, trends are much more mixed at Member State level, while the size of the middle class has shrunk in most of them.

Developments in income inequality and the middle class in the EU

English (2.08 MB - PDF)

Key messages

Income inequality increased in around half of Member States (significantly in many of the pre-2004 group) and decreased in the other half (notably in central and eastern Europe). On average, however, inequality in household disposable income has remained relatively stable across EU Member States over the last 15 years.
EU-wide income inequality declined significantly between 2006 and 2021. This was driven by remarkable income growth in most central and eastern European countries, which led to strong income convergence between the Member States.
There is evidence of a shrinking middle class in almost two-thirds of the Member States. However, the analysis does not indicate a generalised significant shrinking of the middle class, which comprises anywhere between 51% and 75% of the populations of EU Member States.
The proportion of people below the poverty threshold has increased in two-thirds of Member States. This segment of the population was the hardest hit by the cost-of-living crisis.
The welfare state plays an important role in mitigating market income inequality, reducing it by an average of 42% across countries. The weakening of welfare states has contributed to growing income inequality in some Member States.

Executive summary

Public perception is that inequality is on the rise and that the middle class is shrinking. This study analyses empirical evidence over 15 years to clarify the validity of this view. It provides a comprehensive picture of income disparities within and between the EU Member States from 2006 to 2021, covering a wide range of interrelated indicators capturing income inequality, the middle class, the degree of income polarisation and the role of public policies in these trends. It examines the effect of the Great Recession and the COVID-19 pandemic on income inequality and provides insights into the impact of the early stages of the cost-of-living crisis, using 2022 data on the material difficulties faced by European households.

Policy context

After years of being sidelined in the policy debate while European labour markets recovered after the Great Recession, inequality is firmly back on the front page following the COVID-19 pandemic and the ensuing cost-of-living crisis. Growing inequality and a shrinking middle class have emerged as concerns in public discourse since these developments threaten the cohesion of European societies.

Support measures were put in place during the pandemic to maintain employment and help families deal with the consequences of lockdowns, mainly through job retention schemes (and minimum income support systems), facilitated by escape clauses from EU fiscal rules.

In the aftermath of the pandemic, energy prices started soaring. The knock-on effects pushed inflation progressively upwards, leading to a cost-of-living crisis, prompting governments to implement policies to help the most vulnerable households deal with their worsening financial situation.

Labour markets and their institutions are basically national, but adopting an EU-wide approach to monitor income inequality is critical against a background of deepening EU integration and enlargement towards the east since the mid-2000s.

Key findings

EU-wide income inequality declined significantly between 2006 and 2021. This was entirely driven by strong income convergence between EU Member States. Average income inequality within the Member States has remained broadly similar.
This convergence is explained by remarkable income growth in the Member States that joined the EU with the 2004 enlargement (the EU13) and sluggish progress (or even declines) in many of the pre-2004 Member States (the EU14). In contrast to central and eastern European (CEE) countries, income levels in Mediterranean countries generally failed to converge with higher-income Member States.
The stability in average income inequality across countries conceals diverging trends. Income inequality increased in around half of the Member States, especially several Nordic and Continental countries (among them Sweden and Denmark, which were much more egalitarian before), while it declined in just over half, mainly several CEE and Mediterranean countries (among them Romania, Portugal, Greece, Poland and Croatia, which were much more unequal initially).
One of the factors driving income inequality is a widening of wage disparities (which has occurred in around half the Member States); another is the weakening redistributive role of the family in most countries. On the other hand, rising employment (and activity) rates in most countries have reduced inequality. So too has the welfare state’s cushioning of inequality in market income (household income before taxes and benefits are taken into account), although the weakening of welfare states in some countries has contributed to growing inequality.
The growth in income levels in the EU13 was in many cases stronger among lower-income earners, which reduced income inequality. The most positive examples are the CEE countries, although this was not the case in all, because the Great Recession had a particularly strong impact in the Baltic states and other EU13 Member States in the Mediterranean region.
On the other hand, the more moderate income growth in the EU14, especially among the lowest-income earners, led to growing income inequality (and a shrinking middle class). This occurred in the Nordic countries and most Continental countries. Mediterranean countries present the bleakest picture owing to the protracted effects of the Great Recession on their labour markets.
An essential difference between the Great Recession and the COVID-19 pandemic was the coordinated policy response across the EU27 during the pandemic, which resulted in employment levels falling more moderately and in fewer countries than during the Great Recession, continuing income growth across most countries (albeit more moderate than before the pandemic) and less significant increases in income inequality (despite it rising in around half of the countries).
The welfare state plays a critical role in cushioning the effect of market income inequality, reducing it by an average of around 42% across Member States once social benefits and taxes are taken into account.
A large middle class is characteristic of European countries, representing a majority of the population in all Member States, and this reflects inclusive societies. The size of the middle class fell in almost two-thirds of Member States; however, the analysis does not indicate a generalised significant shrinking of the middle class. It has become increasingly difficult for people with low educational attainment, young people and those out of work to enter the middle class.
The share of people below the poverty threshold (60% of median income) increased in two-thirds of Member States between 2006 and 2021, which is consistent with the reduction in the size of the middle class, reflecting a movement from the middle class to the low-income class across many countries.
The best indication of the early impact of the cost-of-living crisis in 2022 is the higher share of households unable to keep their homes adequately warm, since energy price levels grew well above average inflation in 2022. The most precarious households were hardest hit, especially people with low educational attainment, the young, women and those living in single-adult households (especially with children).

Policy pointers

One of the main tools available to policymakers to reduce income inequality is a strong welfare state. Therefore policy tackling income inequality needs to focus on strengthening the redistributive role of social protection systems, especially in those Member States where the weakening of this role has contributed to growing income inequality.
A strong welfare state is especially important during economic downturns. In the case of the COVID-19 pandemic, the massive increase in funds allocated to social benefits in 2020 and 2021, mainly through unemployment benefits to finance job retention schemes, prevented a more negative impact on European labour markets.
Policymakers should be aware of the need to reach the most disadvantaged groups when designing social benefit policies, since many of the lowest-income earners fail to access the benefits they need.
Most countries need to redesign benefit systems to make them more progressive. Redistributing income on a larger scale would improve the capacity of the welfare state to cushion market income inequality. Taxes on wealth, which are negligible across most countries, would provide more means for such redistribution.
The situation of those at the bottom of the income distribution in recent years should be of concern among policymakers. Apart from the increase in the share of people below the poverty threshold in 2021 in half of the Member States, non-income data for 2022 covering the early stages of the cost-of-living crisis reflect the growing financial difficulties faced by households. This hardship could be alleviated by targeted policies addressing the uneven impact of soaring price levels across households.

The report contains the following lists of tables and figures.

List of tables

Table 1: Multiple indicators demonstrating declining EU-wide income disparities (2007–2022)
Table 2: Income levels and income inequality have evolved differently across European regions, from the best performance in CEE countries to the most disappointing in Mediterranean countries (levels in 2007 and change over 2007–2022)
Table 3: Composition of each income class by sociodemographic characteristics, EU27, 2007 and 2022 (%)
Table A1: Summary of empirical studies estimating inequality in EU Member States during the COVID-19 pandemic
Table A2: Multiple indicators point to declining EU-wide income disparities between 2006 and 2021 (excluding Germany)
Table A3: Changes in inequality when moving from market income to household disposable income, EU Member States, yearly average data over 2007–2022 (%)

List of figures

Figure 1: EU-wide population by equivalised household disposable income in PPP euro, 2022 (%)
Figure 2: EU-wide income inequality falls (EU-wide Gini index including and excluding Germany, Gini unweighted average and unemployment rate, 2007–2022)
Figure 3: Income convergence pushes EU-wide income inequality downwards (Theil index, 2007–2022)
Figure 4: Income growth in the EU-wide bottom income quintiles outpaces that in the top quintile (changes in income levels, by quintile, EU-wide, 2007–2022)
Figure 5: Bottom EU-wide income deciles perform better in economic upturns while top deciles perform worse (changes in income over four subperiods, by decile, EU-wide, 2007–2022, %)
Figure 6: Average income levels vary greatly across EU Member States, 2022 (€)
Figure 7: Upward income convergence between EU Member States (real income in PPP-adjusted euro in 2007 and change over 2007–2022)
Figure 8: Income convergence between EU Member States is stronger in times of economic expansion (real income in PPP-adjusted euro and average yearly change over subperiods, %)
Figure 9: Income levels expanded during the pandemic, albeit more moderately than previously (changes in real income levels in three periods, EU Member States, 2019–2022, %)
Figure 10: Economic convergence explains income convergence between EU Member States (average income, GDP per capita and unemployment rate, 2007–2022, %)
Figure 11: Diverging cross-country patterns in income inequality leading to significant changes in the positioning of Member States, 2007 and 2022 (upper panel: Gini index; lower panel: ranking)
Figure 12: Differences in income inequality based on different measures of income, EU Member States, 2022 (Gini index)
Figure 13: Trajectories in the evolution of income inequality, wage inequality and employment level, EU Member States, 2007–2022
Figure 14: Change in real income level by income decile, EU Member States, 2007–2022 (%)
Figure 15: Evolution of inequality based on different measures of income, change in Gini index, EU Member States, 2007–2022 (%)
Figure 16: Wages contribute to income dynamics across EU countries (changes in real wage level by income decile, EU Member States, 2007–2022, %)
Figure 17: Rising employment and activity rates pushed inequality in annual labour earnings downwards (EU Member States, change over 2007–2022)
Figure 18: Smaller average household size reduces the redistributive role of the family (EU Member States, 2007 and 2022)
Figure 19: Changes in income inequality follow the business cycle (changes in Gini index by subperiod, EU Member States, 2007–2022, %)
Figure 20: Inequality trends are largely driven by income growth at the bottom of the income distribution (change in average income levels, by income decile across subperiods, average EU Member States, %)
Figure 21: Trends in wage levels largely explain income inequality (change in wage levels by income deciles across subperiods, average EU Member States, 2007–2022, %)
Figure 22: Growing unemployment played a role in driving income inequality during the Great Recession (change in shares of unemployed people, by income decile, average EU Member States, 2007–2021, percentage points)
Figure 23: The pandemic had a milder impact on European labour markets than the Great Recession (average yearly change in income inequality, wage inequality, real income and employment levels during the Great Recession and COVID-19 pandemic, EU Member States, %)
Figure 24: The relative position of the poorest 20% deteriorated as a result of the Great Recession (share of income, by income quintile, average EU Member States, 2007–2022)
Figure 25: Shares of income received by top and bottom income quintiles in 2022 (top panel) and changes between 2007 and 2022 (bottom panel), EU Member States
Figure 26: Palma index, 2007 and 2022, and change over time, EU Member States
Figure 27: Household market income and disposable income inequality are not closely related (Gini indices, EU Member States, 2022)
Figure 28: Reduction in income inequality after welfare state income redistribution, EU Member States, 2007–2022 (%)
Figure 29: Taxes are more progressive than benefits (shares of benefits received and taxes paid, by income decile, EU Member States’ yearly average over 2007–2022, %)
Figure 30: Progressiveness of benefit systems is mixed across the EU Member States (Share of taxes paid (upper panel) and benefits received (bottom panel), by income decile, yearly average over 2007–2022, %)
Figure 31: Pensions and income tax have the largest effect in moderating market income inequality (reduction in inequality after welfare state redistribution, by policy type, average EU Member States, %)
Figure 32: Pensions are more prevalent among high earners (shares of type of taxes (upper panel) and type of benefits (lower panel), by income decile, EU27 yearly average over 2007–2022, %)
Figure 33: The inequality-reduction role of the welfare state strengthened during the pandemic (change in income inequality after welfare state redistribution, EU Member States, %)
Figure 34: Social benefits expanded in the pandemic (change in amount spent on social benefits, by Member State (upper panel) and by type of policy (lower panel), 2020–2022, %)
Figure 35: Unemployment benefits expanded due to job retention schemes (change in amount spent on unemployment benefits and in the unemployment rate, EU Member States, 2021, %)
Figure 36: Welfare states prevented a more negative impact of the pandemic (changes in income inequality (upper panel) and income levels (lower panel), EU Member States, 2021, %)
Figure 37: The middle class constitutes a majority of the population across all Member States (sizes of income classes by household disposable income, 2022, %)
Figure 38: The middle class is much smaller before welfare state redistribution (sizes of income classes by market income, EU Member States, 2022, %)
Figure 39: Middle class size has remained stable on average across Member States (sizes of income classes, average EU Member States, 2007–2022, %)
Figure 40: The middle class shrank in most Member States (change in the size of middle class, 2007–2022)
Figure 41: The middle class tends to contract in economic downturns (change in size of middle class by subperiod, EU Member States, 2007–2022, percentage points)
Figure 42: Middle-class income levels grew similarly to those of the other classes (changes in real income levels, by income class, 2007–2022, %)
Figure 43: Trends in the share of income received by each income class are mixed (changes in the middle class’s share of income, EU Member States, 2007–2022)
Figure 44: Average cross-country patterns of income polarisation are stable (income distance, by income class, average EU Member States, %)
Figure 45: Mixed cross-country patterns in income polarisation (total (upper panel); in low- and high-income classes (middle panel); within the middle class (lower panel), EU Member States, 2007–2022)
Figure 46: Shares of people below the poverty threshold increased in most Member States, 2007 and 2022 (%)
Figure 47: Mixed cross-country patterns in the shares of people below the poverty threshold before and during the COVID-19 pandemic, EU Member States, 2020–2022 (%)
Figure 48: Households had more difficulty making ends meet in 2022 than in 2021 (shares of people in households reporting difficulty making ends meet, by Member State and income decile, %)
Figure 49: Difficulty keeping homes warm grew in 2022 (shares of people in households unable to keep the home adequately warm, by Member State and income decile, %)
Figure 50: Higher energy prices hit the most vulnerable groups hardest (shares of people in households unable to heat their home properly, EU27, 2021 and 2022, %)
Figure A1: Upward wage convergence between EU Member States (real wages in PPP-adjusted euro in 2007 and change over 2007–2022)
Figure A2: Changes in real income levels by income decile, by subperiod and EU Member State, 2007–2022 (%)
Figure A3: Changes in real wage levels by income decile, by subperiod and EU Member State, 2007–2022 (%)
Figure A4: Changes in the shares of unemployed people, by income decile, subperiod and EU Member State, 2008–2021 (percentage points)
Figure A5: Taxes (upper panel) and most social benefits (middle panel) are progressive, except pensions and sickness benefits (bottom panel) (share of benefits and taxes by income decile, EU Member States’ yearly average over 2007–2022, %)
Figure A6: Benefit systems are progressive across most Member States when pensions are excluded (shares of benefits (excluding pensions) by income decile, yearly average over 2007–2022, %)
Figure A7: Tax and benefit systems were more progressive in 2007 (shares of taxes (upper panel) and benefits (lower panel), by EU Member State and income decile, 2007, %)
Figure A8: Middle-class squeezes are more common in economic downturns (changes in size of middle class over subperiods, EU Member States, 2007–2022, percentage points)
Figure A9: Changes in real income levels by income class over subperiods, EU Member States, 2007–2022 (%)
Figure A10: It is much more difficult for households at the bottom of the income distribution to make ends meet (shares of people in households with difficulty making ends meet, by income decile, EU Member States, 2022)
Figure A11: Material deprivation advances in 2022 (shares of people experiencing material deprivation, by Member State (upper panel) and income decile (lower panel), %)
Figure A12: Shares of people living in materially deprived households, by EU Member State and income decile, 2022 (%)
Figure A13: People in the lowest-earning households are disproportionately affected by soaring energy prices (shares of people in households not able to keep their home adequately warm, by EU Member State and income decile, 2022, %)

Number of pages: 120

Reference nº: EF23034

ISBN: 978-92-897-2411-1

Catalogue nº: TJ-05-24-547-EN-N

DOI: 10.2806/477653

Permalink: eurofound.link/ef23034

Cite this publication
Eurofound (2024), Developments in income inequality and the middle class in the EU, Publications Office of the European Union, Luxembourg.

Key messages

Executive summary

Policy context

Key findings

Policy pointers

Developments in income inequality and the middle class in the EU

List of tables

List of figures

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