In the EU, inequality is rising and the middle class is shrinking, according to a major survey conducted by the European Foundation for the Improvement of Living and Working Conditions, analyzing 15 years of data.
The research provides a comprehensive picture of income inequalities within and between EU Member States from 2006 to 2021, covering a wide range of interrelated indicators, capturing income inequality, the middle class, the degree of income polarization and the role of public policies to these trends.
In parallel, it examines the impact of the COVID-19 pandemic on income inequality and provides information on the impact of the early stages of the crisis on the cost of living, using 2022 data on the material difficulties faced by European households due to and accuracy.
There are significant income differences between EU countries. Figure 6 shows the annual equivalent disposable income of households reported by survey participants in all EU countries in 2021. It reveals stark differences, with average income ranging from over 50,000 euros in Luxembourg to just over 6,000 euros in Romania.
Greece also belongs to the category of low-income countries (with an average income of just over 10,000 euros), followed only by: Poland, Croatia, Slovakia, Hungary, Bulgaria and Romania.
Convergence among EU countries could have been even greater if the small group of countries characterized by middle income levels in 2006 had managed to converge significantly towards higher income levels, as the Central and Eastern European countries did.
Among these countries, which can generally be characterized as Mediterranean, the only one that has managed to significantly reduce the gap with countries characterized by higher levels of income (and thus converge) is Malta.
Spain and Slovenia failed to converge significantly because their income growth was rather modest, while real income levels even fell in Portugal, but most notably in Greece.
In the diagram below, Greece – with the code EL – is ranked among the member states with a low income, just over 12,000 euros.
On the positive side, any correction in income levels has generally been stronger among many middle- and low-income countries.
It was very important in seven Mediterranean countries – Greece and Spain and, to a lesser extent, Italy and Portugal – which largely explains why these countries generally failed to converge towards higher income levels during this period.
The middle class has shrunk
In most member countries, the middle class has shrunk. The chart below compares the size of the middle class in 2006 across all countries and its changes over the period 2006-2021.
For example, the middle class expanded significantly in Romania (by almost 8 percentage points), on the contrary, it shrank significantly in Sweden (by almost 7 percentage points), while in Greece it remained almost stable.
Alarming findings
Income inequality across the EU fell significantly between 2006 and 2021. This is entirely due to strong income convergence between Member States, while average income inequality remained broadly similar.
This convergence is explained by the remarkable increase in income in the Member States that joined the EU with the 2004 enlargement and the sluggish progress (or even decline) in many of the Member States before 2004. In contrast to the countries of Central and Eastern Europe, income levels in Mediterranean countries have generally failed to converge with higher income Member States.
The stability of average income inequality across countries hides divergent trends. Income inequality increased in around half of the Member States, notably in several Nordic and continental countries, while it fell in just over half, mainly in several Central and Eastern European and Mediterranean countries (including Romania, Portugal, Greece, Poland and Croatia, which displayed much greater disparities initially).
Wage inequalities and the middle class
One of the factors leading to income inequality is the widening of wage inequalities (which has occurred in about half of the member countries), while another is the weakened redistributive role of the family in most countries.
The welfare state plays a critical role in mitigating the impact of income inequality on the market, reducing it by around 42% on average across member countries, after social benefits and taxes are taken into account.
A large middle class is characteristic of European countries and represents the majority of the population in all member states, which reflects in inclusive societies. The size of the middle class fell in almost two-thirds of the member countries, however, the analysis does not show an overall significant shrinking of the middle class. It should be noted that it has become increasingly difficult for people with a low level of education, the young and the unemployed to enter the middle class.
The proportion of people below the poverty line (60% of median income) increased in two-thirds of member countries between 2006 and 2021, consistent with a reduction in the size of the middle class, reflecting a shift from the middle class towards the low income class in many countries.
The best indicator of the early impact of the cost of living crisis in 2022 is the higher proportion of households unable to keep their homes adequately warm as energy price levels rose well above average inflation in 2022. The most vulnerable households were most affected, especially people with a low level of education, young people, women and those living in single-adult households (especially with children).
A strong welfare state will reduce inequality
One of the main tools available to policy makers to reduce income inequality is a strong welfare state. Therefore, policy to tackle income inequality must focus on strengthening the redistributive role of social protection systems, especially in Member States where the weakening of this role has contributed to the increase in income inequality, the research underlines.
A strong welfare state is especially important in times of economic downturn. 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 programs, prevented a more negative impact on European labor markets.
At the same time, governments should be aware of the need to reach out to the most disadvantaged groups when designing social benefits policies, given that many of the lowest-income workers do not have access to the benefits they need.
Wealth taxation
In addition, most countries need to redesign their benefit systems to make them more progressive. Redistributing income on a larger scale would improve the welfare state’s ability to mitigate market income inequalities. Taxes on wealth, which are negligible in most countries, would provide more means for such redistribution.
The situation of people at the bottom of the income distribution in recent years should concern policy makers in the EU and individually in its member countries.
In addition to the increase in the proportion of people below the poverty line in 2021 in half of the member countries, the non-income figures for 2022 covering the early stages of the cost of living crisis reflect the growing economic difficulties facing households. These difficulties could be alleviated by targeted policies that would address the uneven impact of rapid price increases on households – a problem that has been particularly acute in Greece for some time.
