Income inequality

Widening income inequalities can lead to a range of policy problems, including a larger number of people at risk of poverty, increased inequalities in later generations, a weakening of social cohesion and a slowdown in economic growth.

Increasing inequality in earnings and in access to employment tends to be associated with polarisation and with the increasing fragmentation of communities, ethnic groups, regions and social classes. This serves to reduce both social cohesion and the level of trust and cooperation within society. It can thus adversely affect social and political stability and economic growth, both by reducing productivity and by deterring investment.

Summary of findings

The extent of inequality differs markedly between Member States, as do the changes that occurred in the period 2003-2008, the position of the middle class (those people whose income is around the median) and the degree of polarisation of income distribution. In terms of the main income sources, the structure of household income varies less, but there are major differences between income groups in the different countries.

According to the Gini coefficient (one of the main measures of inequality), Latvia was the most unequal country in the EU in 2008 in terms of income distribution, followed by Lithuania, Portugal, Romania, Bulgaria and Greece. The country with the most equal distribution was Slovenia, followed by Hungary, Sweden, Slovakia and the Czech Republic.

The ranking of countries according to other inequality measures is generally similar to their ranking according to the Gini coefficient. The main differences occur in the case of measures that are more sensitive to the two extreme ends of the income distribution, the SCV (squared coefficient of variation) index and the Atkinson (ε = 2) index.

Changes in the Gini coefficient over the period 2003-2008 suggest that inequality has increased in Denmark, Germany, Luxembourg, Sweden and France, and has fallen in Ireland, Hungary, Portugal and Estonia.

In 2008, the proportion of those with income close to the middle of the income distribution was largest in Denmark, Slovenia and the Czech Republic, and was smallest in Latvia, Lithuania and Romania. This implies that the degree of polarisation was greatest in the latter countries (i.e. they had the largest proportion of population with income spread away from the median). The ranking of countries according to measures of polarisation is similar to that revealed by measures of inequality (such as the Gini coefficient), though there are some differences.

Market income as a share of household disposable income in 2008 varied from a high of 85% in Latvia to a low of 70% in Hungary, while earnings from employment were highest in Latvia and Estonia (around 80% of disposable income) and lowest in Italy and Greece, where income from self-employment is highest.