The decomposition of income inequality in the EU-28

Abstract

This paper analyses the structure of the European income inequality by a decomposition in a within- and between-component. It illustrates a replication of the work of Beblo and Knaus (Rev Income Wealth 47(3):301–333, 2001) and decomposes the income inequality for the EU-28 in 2014 by using data from the European Survey on Income and Living Conditions. The Theil index is applied to additively decompose the sources of inequality into a within- and between-component by countries, country groups and demographic groups. This is done by using equivalised disposable household income and income before transfers and taxes. The results show that inequality, with regard to disposable income, is highest for households with household heads older than 59 years and lowest for households with children. Moreover, high income countries have lower inequality, higher social expenditures and show a stronger relative reduction of income inequality after transfers and taxes than low income countries. On country group level, Social-Democratic countries have the lowest income inequality and redistribute most, while the opposite holds true for Baltic countries.