Decomposing European NUTS2 regional inequality from 1980 to 2009 : National and European policy implications

Purpose – The purpose of this paper is to analyse income inequality for a sample of 14 European countries and their composite regions using data from the Cambridge Econometrics regional dataset from 1980 to 2009. The purpose of the paper is to provide insight into the dynamics of regional and national cohesion among the EU‐14 countries studied. Design/methodology/approach – Initially, inequality is decomposed using the Theil coefficient into between and within country inequality to assess the extent to which convergence has occurred. To investigate the underlying causes of the changes in inequality, the Theil coefficient is further decomposed to assess the contribution of productivity and employment‐population ratio differentials to inequality. Findings – The results indicate that while between‐country inequality has declined, within‐country inequality has increased by approximately 50 percent. Subsequent decomposition indicates that while productivity levels among regions have converged, the employment‐population ratios have diverged substantially driving increasing levels of inequality. This suggests that while EU cohesion policies have reduced productivity inequalities they have had little effect in stimulating convergence of employment‐population ratios across regions. Research limitations/implications – The paper argues that national priorities, particularly in the context of the current European economic crisis, are likely to hinder European Union level policies to reduce income inequality at a regional level. This may result in further increases in regional inequality among European regions. Originality/value – This paper's main contribution is to highlight how national convergence can lead to regional divergence being overlooked. The value of the paper is that it provides policy insights, based on empirical evidence, for European cohesion policy.