Regional integration and inequality comovement: evidence from Europe

ABSTRACT

We find strong patterns of income inequality comovement in the eurozone over the past 40 years. The acceleration of this comovement largely echoes with the development of the eurozone and the further economic and political integration among its member economies. Comparison between the eurozone and non-eurozone economies suggests that the economic and political integration may contribute to the synchronization of income inequality fluctuations.

KEYWORDS:

• Regional integration
• inequality comovement
• dynamic factor model

JEL CLASSIFICATION:

• D31
• F41
• O19

Acknowledgments

We would like to thank Tilak Abeysinghe, Lin Ma, Dannis Tkachenko, Shenghao Zhu, and participants of the Macroeconomics reading group and International Trade reading group in the National University of Singapore for helpful comments and discussions. All errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The literature on income inequality has now covered a large number of countries and traced the inequality series to early twentieth century (Atkinson and Piketty 2009, 2010). Atkinson, Piketty, and Saez (2011) review the recent studies and confirms the U-shape trend of inequality for many developed economies.

² Even though the inequality fluctuation becomes more synchronized, our result does not imply the income inequality in Europe converges in level.

³ The Pareto-Lorenz coefficient measures the concentration of income at the right tail of income distribution. A larger coefficient corresponds to lower income inequality. For more details, please refer to Atkinson, Piketty, and Saez (2011).

⁴ For most countries in our sample, annual inequality measure is available. For Germany, inequality measures were available every three years from 1974 to 2000; for Switzerland, inequality measures were available biannually from 1976 to 1994; Spain had missing inequality measures from 1975 to 1980; United Kingdom had missing data from 1987 to 1992. We linearly interpolate the missing data for these four countries. The result is robust using different interpolation methods for the missing data. Other EU economies are excluded due to severe data limitation.

⁵ We include Denmark in our ‘eurozone’ sample because the Danish Krone maintains a fixed exchange rate with the euro through the European Currency Unit (ERM II).

⁶ The signing of Maastricht Treaty kick-started the second phase of economic integration for the EU economies, and represented the critical time point for the economic convergence of EU economies. For more details, see the timeline of EU economic history at http://ec.europa.eu/economy_finance/economic_governance/timeline/index_en.htm.

⁷ The results remain robust if we use alternative cutoff points at 1990 and 1999.

⁸ In terms of GDP, France, Germany and Italy rank the highest among economies within the eurozone, and the United Kingdom is the largest EU economy outside of the eurozone.