After years of being sidelined in the European policy debate as labour markets recovered in the wake of the Great Recession, inequality is back on the agenda following the COVID-19 pandemic and the ensuing cost-of-living crisis. A widespread public perception is that inequality is growing while the middle class is shrinking. This article presents a more nuanced picture: income inequality in the EU as a whole has declined due to strong income convergence between the Member States; changes in income inequality across these countries are mixed, increasing in about half of them and declining in the other half; and the middle class shrank in almost two-thirds of Member States since 2006.
These findings are based on Eurofound’s recently published report Developments in income inequality and the middle class in the EU. The analysis uses EU-SILC updated household disposable income data for the 27 EU Member States over 2007–2022. Note that due to a one-year lag in EU-SILC income data, these data actually refer to the years 2006–2021.
Decline in EU-wide income inequality due to income convergence
Empirical studies that adopt a truly EU-wide approach to measure income inequality are scarce. Doing so requires all EU citizens to be considered part of a single EU-wide income distribution (shown in Figure 1), which is shaped by income disparities both between and within countries. Two insights emerge from this exercise. The first is that income disparities between countries are reflected in the different positions they occupy on the EU-wide income distribution: the populations of the Member States that joined the EU after the 2004 enlargement (the EU13) are relatively more present in the bottom EU-wide income quintile, while those of the pre-2004 Member States (the EU14) account for almost all the top quintile. (Most of the top 1% of income earners come from Germany, France and Italy, followed by Spain and the Netherlands.) The second insight is that income disparities within countries are evidenced by the fact that countries, especially the largest ones, are spread over the EU-wide income distribution and relatively present across all the income quintiles.
Figure 1: EU-wide income inequality – shares of the EU population by equivalised household disposable income level in PPP € and Member State, 2022 (%)
Notes: Income distribution for individuals aged 15+. Data on equivalised household disposable income is made comparable across Member States using euro adjusted by purchasing power parity (PPP). The vertical lines indicate EU-wide income quintiles.
Source: EU-SILC 2022 edition (income referring to 2021)
Income inequality in the EU as a whole can be broken into two elements using the Theil index: between-country and within-country income disparities (see Figure 2). The index shows that EU-wide inequality declined over the period. This reversed temporarily during the Great Recession and its aftermath before resuming thereafter and continuing even in the most recent years of the COVID-19 pandemic.
Figure 2: EU-wide income inequality – evolution of inequality levels as measured by the Theil index, 2007–2022
Source: EU-SILC 2007–2022 editions (income referring to 2006–2021)
The contribution of between-country and within-country income disparities is very different. Income disparities between countries reduced, and this is entirely responsible for the fall in EU-wide income inequality over the 15 years analysed. This was caused by strong convergence in average income levels between Member States, largely due to remarkable catch-up income growth in most of the EU13 and much more modest progress in the EU14.
On the other hand, within-country income disparities represent the lion’s share of EU-wide income inequality (and increasingly so, given the abovementioned reduction in income disparities between countries), but they did not play a significant role in the evolution of EU-wide income inequality because they were broadly similar at the beginning and the end of the period.
Mixed picture of income inequality in Member States
The relative stability of aggregate within-country income inequality conceals diverging patterns across countries, captured by comparing inequality levels at the beginning and the end of the period (Figure 3). The picture is mixed: inequality increased in around half of the Member States (the 13 countries below the diagonal line in Figure 3), especially in Sweden, Denmark, Malta and Bulgaria; and inequality declined in the other half (the 14 countries above the diagonal line), significantly so in Poland, Romania, Portugal and Slovakia.
Figure 3: Diverging cross-country patterns in income inequality, 2007 and 2022 (Gini index)
Source: EU-SILC 2007 and 2022 editions (income referring to 2006 and 2021)
Some convergence in income inequality levels between countries took place. Among the countries initially characterised by relatively low inequality, a consistent upward trend is apparent in several of the EU14, including the Nordic Member States (Sweden, Denmark and Finland) and some continental Member States (Austria, Luxembourg and France), as well as Malta and Hungary. Among those countries initially characterised by relatively high inequality levels, a moderation occurred in several of the EU13 (Romania, Poland, Croatia, Latvia, Estonia and Cyprus), as well as Portugal, Greece and Ireland. These diverging trends have shaken up the position of some countries along the inequality scale: Sweden and Denmark have become relatively more unequal, while Poland is much more equal now than in 2006.
Middle class decreases in most Member States
EU Member States are middle-class societies, with most people belonging to this class. (Middle class is here defined as people with an equivalised household disposable income between 75% and 200% of the national median.) On average across the Member States, the middle class comprises 64% of the population (while 28.5% and 7.5% belong to the lower-income and higher-income classes, respectively), ranging from above 75% in Slovakia to 51% in Bulgaria. A large middle class makes for cohesive societies, where a large proportion of people is concentrated around the middle of the income distribution. This explains why the size of the middle class and income inequality levels are closely correlated.
Changes in the size of the middle class and in income inequality are closely correlated too, but the picture across the Member States is more generalised in this case. While the cross-country average size of the middle class has remained broadly stable over the period (contracting negligibly from 64% to 63.8%), it shrank in almost two-thirds of Member States, although to varying degrees. This is shown in Figure 4, where countries are ranked from that with the largest increase in size to that with the largest decline. The contraction was more significant in those countries to the right of the figure, a mix of EU14 (especially Sweden and Luxembourg, and also the Netherlands, Germany, Austria and Denmark) and EU13 (especially Bulgaria and Malta, and also Lithuania, Czechia, Hungary and Estonia). Conversely, the middle class expanded in 10 countries (to the left of the figure), very significantly in some of the EU13 (Romania, Poland and Croatia), Portugal and Ireland.
Figure 4: The middle class shrank in most countries – change in the size of middle class 2007–2022 (percentage points)
Notes: Data depict the changes in the size of the middle class, differentiating between people coming from the low- and high-income classes in cases of increases in the middle class, or going into the low- and high-income classes in cases of declines in the middle class. For this reason, the sign of the changes in the size of the low- and high-income classes has been inverted. Countries are ranked by the change in the size of the middle class, from biggest increase to biggest decline. EU27 values refer to the unweighted average across the Member States.
Source: EU-SILC 2007–2022 editions (income referring to 2006–2021)
Figure 4 offers two more insights. One, the generalised shrinking of the middle class translated to a greater extent into downward movements of people into the lower-income class. Two, countries have converged in terms of the size of the middle class, due to its contraction in some where it was very large initially (for instance, Sweden, Denmark, the Netherlands and Czechia) and its expansion in others where it used to be smaller (for instance, Romania, Latvia and Portugal).
An analysis of the composition of the middle class shows that people with lower educational levels, younger people, women, people living in single-adult households and unemployed people are less likely to be part of the middle class (and much more likely to belong to the lower-income class). Moreover, it has become increasingly difficult over time for people who have low educational attainment, are young or are unemployed to enter the middle class.
Factors affecting trends in income inequality
One factor that has pushed income inequality higher over the period (and reduced the middle class) is the weakening of the income redistribution carried out at family level (mainly due to a fall in average household size), which has occurred in most countries. Another is the widening of wage disparities in labour markets, which has occurred in around half of countries.
On the other hand, two factors that have tended to lower income inequality (and increase the middle class) are the higher employment and activity rates in most countries, and the income redistribution carried out by the welfare state in more than half of countries. The latter was especially evident during the COVID-19 pandemic, when the welfare states of most countries deployed job retention schemes, which prevented a squeeze on household incomes. As a result, the impact of the pandemic was much more moderate than that of the Great Recession between 2008 and 2013: employment levels fell modestly and in fewer countries, which explains why income levels continued expanding (albeit more moderately), and rises in income inequality across countries were less significant.
Potential of better policy design
Nevertheless, the weakening of the welfare state has been a factor in growing income inequality in some Member States. The available data show that the poorest people find it especially difficult to access the social benefits to alleviate their situation, which points to the need to improve the accessibility of benefits and to close the gaps in application processes. Moreover, in only a third of Member States are social benefits allocated in a progressive way (meaning those in the bottom half of the income distribution receive a larger share of the benefits than those in the top half). Even when pensions are excluded, there are several countries where higher-income earners receive a larger share of the benefits than their lower-income counterparts. Greater income redistribution would improve the capacity of the welfare state to cushion income inequality and make benefit allocation more progressive.
Concluding remarks
This article summarises trends in income disparities within the EU over 15 years based on the data available. It shows that EU-wide income inequality declined because of strong income convergence between the Member States, largely due to remarkable catch-up growth in household income in the EU13. Against well-established public perceptions of growing income inequality and a shrinking middle class, it shows that income inequality increased in around half of the Member States, while the middle class shrank in almost two-thirds of them, although to varying degrees.
When these findings are put together, a nuanced picture of different patterns across European regions emerges. The most positive aspect is presented by many of the EU13: apart from strong income growth in most, several countries became less unequal, and their middle class expanded (Romania, Poland, Croatia, Slovakia and Latvia). A bleaker dynamic characterises the EU14. Many registered growing inequality and a shrinking middle class: all three Nordic Member States (Denmark, Finland and Sweden) and Austria, Germany, France and Luxembourg among the continental Member States. In the Mediterranean Member States (Greece, Italy, Portugal and Spain), this did not occur (except in Italy), but disparities narrowed against a background of poor income growth, which prevented a significant convergence of these countries towards higher income levels.
Because of the opposing trends in different groups of countries, they have also converged in terms of income inequality and the size of their middle class, although less intensely than the convergence in income.
