Education and Income Inequality in the Regions of the European Union

This paper provides an empirical study of the determinants of income inequality across regions of the EU. Using the European Community Household Panel data set for 102 regions over the period 1995-2000, it analyses how microeconomic changes in human capital distribution affect income inequality not only for the whole of the population but also for normally working people. Human capital distribution is measured in terms of both educational attainment as well as educational inequality. Income and educational inequalities are calculated by a generalised entropy index (Theil index). Different static and dynamic panel data analyses are conducted in order to reduce measurement error on inequalities and minimise potential problems of omitted-variable bias. Taking into account the specification tests applied to the estimated models, the regression results reveal that, while the relationship between income inequality and income per capita is positive, the long-run relationship between income inequality and educational attainment is not statistically significant. This paper also agrees with the current belief that educational inequality has a positive relationship with income inequality. Across European regions high levels of inequality in educational attainment are associated with higher income inequality. This may be interpreted as the responsiveness of the EU labour market to differences in qualifications and skills. The above results are robust to the definition of income distribution. Other results indicate that population ageing and inactivity are sensitive to the specification model, while work access and latitude are negatively associated to income inequality. Urbanisation has a negative impact on inequality but for the whole of the population only. Furthermore, the relationship between unemployment and income inequality is positive. Female participation in the labour force is negatively associated with inequality and explains a major part of the variation in inequality. Finally, as expected, income inequality is lower in democratic welfare states, in Protestant areas, and in regions with Nordic family structures (i.e. Swedish and Danish regions).