European Review, Vol. 25, No.

3, 438–452 © 2017 Academia Europæa

doi:10.1017/S106279871700014X

Crisis and Inequality in the

European Union

IGNACIO AMATE-FORTES, ALMUDENA GUARNIDO-

RUEDA and AGUSTÍN MOLINA-MORALES
Department of Economics and Business, University of Almeria, Carretera de
Sacramento s/n, 04120, Almeria, Spain. E-mail: iamate@ual.es

The objective of this work is to analyse the factors that influence a greater or lesser
inequality in income distribution in the 27 EU countries, paying particular attention
to the effect that the economic crisis has had. For this purpose we have used panel
data covering a period of 16 years (from 1996 to 2011, inclusive), and we have
introduced additional variables over and above those normally used, such as the
ideology of the governing party, the economic freedom index, as well as the ‘crisis’
variable. The results obtained enable us to conclude that while the economic crisis has
not necessarily caused a worsening in inequality, the response of European govern-
ments by means of social policy has not so far proved effective in the fight against the
lack of equality in income distribution.

Introduction
If governments pursue a more equitable distribution of income, will it help the eco-
nomic crisis? Has democracy achieved improvements in the equitable distribution of
income? Has the economic liberalization that now prevails in the world brought
about a reduction in the gulf between rich and poor? Are Social Democratic
governments more concerned than others with inequality? To these and other ques-
tions we will try to respond in this work. In fact, we hope to contribute to the
understanding of behaviour and the determining factors that influence a greater or
lesser inequality in income distribution, focusing our attention on the effect that the
economic crisis is having on inequality, and on the policies employed in combating
the said inequality.
To this end, a model of panel data for the 27 nations of the European Union has been
applied, covering a period of 16 years (from 1996 to 2011, inclusive). The use of such
a heterogeneous model – made up of nations of differing levels of economic development
and which have undergone different historical processes of integration – the inclusion
of the institutional variables and the deployment of the ‘crisis’ dummy variable with
 Crisis and Inequality in the European Union 439

spending on social benefits are, to our understanding, aspects both relevant and original
in the analysis of income distribution, given that empirical studies that use these types of
variables are rare in this field.
The objective of this study is to analyse the determining factors in income
distribution, so that we may discern the influence of different types of variable, this
being the study’s fundamental aim. To this end, we have introduced a series of
variables in addition to the ones generally used, such as the ideology of the governing
party, the index of economic freedom, the typicality of Scandinavian countries or the
indirect tax pressure. The results obtained show that the model used is robust, and
that equality in income distribution has diminished with the decrease in the impor-
tance of the remuneration of salaried workers within the GDP and with global
economic freedom, at the same time improving in countries who apply the Nordic
model and where democratic development has occurred. As for the effect that the
crisis has had, the results suggest that it is not this alone per se, but also the social
policy put in train by European countries during this period, that has increased the
lack of equality in income distribution.
The study is structured as follows: after the introduction, in the second section we
give an overview of the various explanatory theories on income distribution and carry
out an analysis of the determining factors, distinguishing and evaluating those that
are economic, and those that are institutional. Then, in the third section, we apply the
panel data previously mentioned to the 27 nations of the European Union in order to
determine the relative influence of the different variables. Finally, in the fourth
section, we demonstrate our conclusions.

Theoretical Background
Since the classical era, economic theory has concerned itself with the question of
distribution and performance in economic activity. This interest starts with Quesnay
and his ‘Tableau’, which represents as a double-entry chart the various contributions
to production of the various branches and, of course, their distribution. Adam Smith
and Karl Marx, authors as paradigmatic as they are different, were preoccupied with
the subject of distribution. Some of the marginal thinkers such as Leontief and Sraffa1
were also interested in the distribution issue. On top of this, there exist various models
of distribution and growth arising out of Ricardian, Marxist, Neoclassical and
Keynesian theory.2 Keynes and the Post-Keynesians made important contributions
to this subject. As Paukert3 maintains, Keynes transformed the most convincing idea
against equality of income into the most important argument in its favour – namely
that the frugality of the most opulent classes, far from encouraging economic growth
(as the classical school argued), holds it back, and consumption is the most effective
method of expanding production in an economy. Dutt4 and Taylor5 posit a theory of
distribution implicit in the General Theory and in the Treatise on Money,6 which
claims to identify a relationship between distribution theory and effective demand
theory. However, Kaldor2 had already proposed a Keynesian theory of distribution.
Basing his argument on long-term considerations, Kaldor used the theoretical tool of
440 Ignacio Amate-Fortes et al.

the multiplicator in order to explain aspects of distribution. In the same way, other
Post-Keynesian authors7–9 tried to explain the relationship between production
growth and its distributive consequences. Despite this initial interest, no special
attention appears to be paid, in conventional macroeconomic texts, to the theme of
distribution as a key element in understanding the functioning and development of
economies and, in particular, of the less-developed ones. In this sense, distribution
analysis has also taken a secondary place in empirical studies.
If in fact there exists no consensus with regard to an economic theory that includes
all the relevant aspects of personal income distribution, as opposed to the analysis of
functional distribution, which was abundantly developed from the starting-point of
the works of David Ricardo,10 then the empirical studies that have recently been
addressed to inequality of income distribution have aligned themselves in two direc-
tions: (a) analysing the relationship with and/or the effect on economic growth, and
(b) analysing the determinant factors in this.
Among studies of income distribution that have been carried out, the majority of
them using simple countries, economic growth has been the factor most examined,
most of all since Kuznets11 proposed his famous ‘U Hypothesis’. His conjecture – that
inequality increases in the early stages of development, only to diminish later as
part of the development process – has been the object of innumerable sub-
sequent empirical studies. The literature has labelled this approach the ‘Inverted
U Hypothesis’. This hypothesis has been contrasted empirically with various
results. Some studies have supported Kuznets’ Hypothesis, whereas others have
dismissed it.
What is certain is that, around this same area, an abundant economic literature
has grown up concerned with proving or refuting its propositions. Since the 1990s,
the relationship between economic growth and income distribution has awoken
enormous interest among economists. Although there are many opinions concerning
the nexus of the two variables, they do not always follow the same line of thought,
and emerge as a subject of considerable controversy, in which a variety of approaches
can be found.

∙ One the one hand, there are those that point to a negative effect of
inequality on growth, as is the case with Alesina and Rodrik,12 Bertola,13
Galor and Zeira,14 Piketty15 and Perotti,16 among others.
∙ On the other hand, there are those that maintain that growth has a sparse
or even negative impact on inequality, both supported by different sets of
data. Thus, for example, Pscharopoulos et al.17 observe that inequality
diminishes in Latin American countries when per capita income rises,
while Ravallion and Chen18 can find no reason whatsoever to support this
conclusion in their study, which covers 42 countries.
∙ In third place, there is yet another set of studies that argue for a two-way
influence of inequality over economic growth, of such a form that, beside
the influence of growth on inequality, it is accepted that a certain level of
inequality can stimulate growth along particular paths of investment.
 Crisis and Inequality in the European Union 441

Another variable that has been used is inflation, to which controversial effects on
inequality have been attributed. In some studies, inflation is associated with an expansion
of the poverty bubble, most of all in periods of hyperinflation.19 Al-Marhubi,20
by means of regressors applied to data drawn from 53 countries in the 1975–1995 period,
reaches the conclusion that high inequality in income is linked to a high rate of inflation.
In the same way, the unemployment rate is analysed in numerous studies and there
are those that assess the negative impact of this variable on inequality.21 In the
Spanish case, the work of Ayala et al.22 points out certain effects of unemployment on
inequality that have little significance. On the other hand Sahn et al.23 see in exchange
rate depreciation one of the factors that could trigger an increase in equality if the
incomes of the least-favoured (informal sector), tied to the sectors that are most
isolated from the outside world, are seen as less affected than the workers in open,
dynamic modern technology sectors.
Another variable used is the participation of agriculture in national output. The
relative importance of the agricultural sector has been analysed by many authors
since the pioneering studies of Oshima24 or Kuznets.11 This indicator marks the
transition to more advanced states of economic development and is related to other
interesting variables – such as the percentage of the population that is urban or rural –
which combine certain characteristics influential in determining a greater or lesser
inequality of incomes.25
With regard to demographic factors, such as birth rate or migration, these can
have distributive effects, and, at the same time, inequality can stimulate or discourage
certain behaviour linked to these demographic variables. Ngwane et al.26 carried out
a study based on a regression model, in which the Gini Index is the dependent vari-
able that is explained by demographic variables relating to weightings of certain
population groups, gender of the head of the family, etc. By means of this procedure,
it was possible to note the cross-effects between demographic variables and personal
income distribution. Initial levels of per capita income, inequality and poverty are
also considered.
Concerning this, some studies17,27 have concentrated on the role of education, and
these have noted empirically that improving the levels of education is an effective tool
in enabling the reduction of inequality and poverty in income distribution.
The inclusion of institutional variables in empirical works that study income dis-
tribution is relatively recent and still rare, and this presents two problems: the poor
timespan coverage of many indicators, which impedes the proper use of panel data,
and the differences that exist with regard to the coverage of countries, a state of affairs
that inclines the contemporary investigator to select a group of countries that he
proposes to analyse. Even so, the interest that this type of variable has aroused among
scholars is bringing about a situation where the data are each time more complete,
both in terms of the period of time to be considered and in the number of countries
analysed.
In whatever case, we encounter studies with aspects of the political type such as the
independence of the central banks, the stability and democratic nature of the system,
the economic reforms undertaken, the level of uncertainty and confidence in
442 Ignacio Amate-Fortes et al.

governments and the degree of openness in the economy. As an example of analysis of

these types of factors, Al-Marhubi20 introduces variables that register the frequency
of coups d’état and revolutions, the number of political transitions and the reper-
cussions these have on the changes of governors of the central issuing bank. By means
of disturbances and socio-political instability, Alesina and Perotti28 and Benhabib
and Rustichini29 have developed studies in which they show the negative effect of
widespread inequality on economic growth owing to a rise in crime, social unease and
political instability, which a high level of inequality provokes. Afonso et al.30
demonstrate that, to the extent that the quality of the institutions is better – as mea-
sured through the judicial system, bureaucracy and regulation – then the more effi-
cient is social spending and the fairer is the distribution of income.
Finally, there is a small group of investigators who have tried to analyse the
relationship between the economic crisis and inequality of income distribution. Thus,
Wisman and Baker31 conclude that the lack of equality in income distribution is one
of the dislocators causing the financial and economic crisis. However, Atkinson and
Morelli32 do not manage to arrive at any firm conclusion that the rise in inequality is
one of the causes of the economic crisis. On the contrary, empirical evidence shows
that the financial crisis carries with it an increase in inequality.

The Model
The Tobit model and a linear model are used, in the hope of explaining the dis-
tribution of income by means of economic, institutional and geopolitical variables, as
has already been indicated.
The time period we have considered has been restricted by the availability of data,
fundamentally data on institutional variables. We have been able to generate a panel
data model for a 16-year period, taking in 1996 to 2011. In this sense, the use of panel
data in order to study the economic and institutional determinants of income dis-
tribution is ground-breaking in that the majority of empirical studies employ cross-
sectional data, for the reason that the institutional indices have been created relatively
recently and that it has not been previously possible to deploy them in a series of more
than ten years for some of these indicators. In this way, we have been able to analyse
432 observations for each one of the variables used, since we have employed a sample
of 27 countries over a 16-year period.

Data
The variables we have used are summarized in Table 1.

The Model
The Tobit model used here has been estimated to maximum likelihood, and the linear
model has been estimated through the estimators of Feasible Generalized Least
Squares (FGLS), Panel Corrected Standard Errors (PCSE) and Robust Generalized
Method of Moments (RGMM) for dynamic panel data. In the case of this second
Table 1. Taxonomy of the modelled variables

Name Description

Income distribution We have used two measures of income distribution:

(1) The Gini Index.
(2) Ratio of incomes between two extreme quintiles, which is to say, the relationship between the total income of the
richest 20% and the 20% poorest of the population. Source: Eurostat.
Spending on social protection Defined as the spending undertaken by the public sector on social benefits, whether they are Money transfers or cash
(welfare) payments, in relation to the GDP. Source: Eurostat.
Importance of the pay of salaried Defined as total pay received by the worker, whether in cash or transfer, including social contributions. This variable
workers within the GDP is measured in relation to the GDP. Source: Eurostat.
Indirect tax pressure Defined as indirect tax income (production and imports) in relation to the GDP. Source: Eurostat.
GDP per capita Measured in US dollars. It is a proxy variable of a country’s level of development. Source: Governments Finance
Statistics, IMF.
Importance of the agricultural We also use this as a proxy variable of a country’s level of economic development, to test the relationship that exists
sector in the GDP between economic development and equality of income distribution. As Cameron25 indicates, inequality of income
increases as the importance of the agricultural sector in the economy diminishes. Source: World Bank

Crisis and Inequality in the European Union

Civil Liberties Index of Civil Liberties: This is an index prepared by the NGO, Freedom House, and which includes evaluations
of religious and press freedom, the Rule of Law, economic, human and association rights.
Political rights Index of Political Rights: This is an index prepared by the NGO, Freedom House, and which includes evaluations of
free and impartial elections, multiple political parties, a significant opposition, military dominance and self-
determination of minority groups.
Economic freedom Index of Economic Freedom: It is an index prepared by the Heritage Foundation/Wall Street Journal Institute of
Investigation and includes assessments on commercial policy, Government tax load, Government intervention on
economy, monetary policy, foreign investment and capital flow, foreign activity, financial activity, salary and price
control, property rights, and black market regulation and activity.
Corruption Index of Perception of Corruption: This is an index prepared by the NGO, Transparency International, and includes the
perceptions of businessmen, academics and analysts about the level of corruption in civil servants and politicians.
Economic crisis Its value is 1, if the year falls between 2008 and 2011 (the years of economic crisis in the European Union) and 0 in any
other case. Further, we have interacted the social spending variable with this one in order to test whether the policy of
social spending during the crisis is designed to combat inequality of income or not.
Governing political party Its value is 1 if the government is left-wing or left-centre, otherwise it is 0. With this variable we intend to test if the
left-wing governments adopt efficient measures to alleviate inequalities in income distribution. For this, we have
interacted the social spending variable with this one, to test whether social spending policy is more efficient when
designed by left-wing governments.
Mediterranean countries Its value is 1 if the country is Mediterranean, and 0 in the contrary case. Once more, we want to study whether the
Mediterranean social welfare model is more efficient than the others, or not.
Scandinavian countries Its value is 1 if the country is Scandinavian, and 0 in the contrary case. Once more, we want to study whether the

443
Scandinavian social welfare model is more efficient than the others, or not.

Source: Compiled by authors.

444 Ignacio Amate-Fortes et al.

model, at the time of choosing these estimators a series of tests was carried out in
order to determine the most efficient, in accordance with the variables used.
In first place, we applied the Lagrange Multiplier Test for random effects.
The value obtained for chi squared (χ2) led to rejection of the null hypothesis,
making the use of Ordinary Least Squares (OLS) for the random effects
model preferable to the pooled model (pooled OLS) – that is to say, the usual OLS
estimator.
Secondly, we carried out a similar test in order to determine whether the estimator
for fixed effects was also better than the pooled model. The F test for the significance
of fixed effects showed that, effectively, it is preferable to use the fixed effects
estimator.
In the third place, the Hausman test was used to decide between random and fixed
effects. The value of χ2 obtained allows us to reject the null hypothesis, which is to say,
the difference between the coefficients of random and fixed effects is clearly systemic,
making it convenient to use fixed effects.
In the fourth place, the Wooldridge test was carried out. This test demonstrated
that the model did not have any autocorrelation problems. Finally, the modified
Wald test proved that the model is heteroscedastic. In order to solve this, the two best
estimators are Feasible Generalized Least Squares (FGLS) and Panel Corrected
Standard Errors (PCSE). Although, Beck and Katz33 demonstrated that the standard
errors of PCSE are more precise than those of FGLS, as the authors showed that
when N > T (as is the case where N = 27 and T = 16), and that FGLS should not be
used, we decided however to use both models, in order to check the robustness of
the model.
In addition, regarding the possible existence of an endogeneity problem in the
fiscal variables and the variables that measure the economic growth and social
spending, we decided to use the GMM estimator34 for dynamic panel data in its
robust version due to the presence of heteroscedasticity. We used the lagged fiscal
variables and those that measure economic growth and social spending as instru-
ments, and the exogenous variables. The comparison of the results obtained through
this estimator with those obtained with FGLS and PCSE once again allows the
analysis of the model’s robustness.
We have used panel data to jointly evaluate all the economic, institutional and
geopolitical variables used. Using panel data instead of cross-section analysis – which
is the most often-used by those investigators who employ institutional variables for
previously-mentioned problems of data availability – allows us to check individual
heterogeneity, produce data with a higher degree of variability and a lower level of
collinearity among the regressors, study dynamic adjustment processes, identify and
measure effects that are not detectable with pure cross-section or time series data, and
build and contrast models of more complex behaviour than would be possible with
simpler data.
We have undertaken eight separate estimations depending on the estimator used
and the measure of inequality employed, which is to say, the Gini Index and the
income ratio between the 20% richest and 20% poorest of the population.
 Crisis and Inequality in the European Union 445

In this way, we have estimated using the following models.

∙ Tobit model
8

< IDit if 0 < ID
it < 100
IDit = 0 if ID
it ≤ 0 (1)
:
0 if ID
it > 100

ID
it = α + β1 SOCIALit + β2 WAGEit + β3 ITAXit + β4 Yit + β5 AGRit

+ γ 1 ICLit + γ 2 IPRit + γ 3 IEFit + γ 4 IPCit + λ1 NORDICit
+ λ2 MEDITERRANEANit + λ4 PARTYit + θ1 CRISISit
+ θ2 SOCIAL CRISISit + θ3 SOCIAL PARTYit + ηi + δt + μit ð2Þ

∙ Linear model
IDit = α + β1 SOCIALit + β2 WAGEit + β3 ITAXit + β4 Yit + β5 AGRit
+ γ 1 ICLit + γ 2 IPRit + γ 3 IEFit + γ 4 IPCit + λ1 NORDICit
+ λ2 MEDITERRANEANit + λ4 PARTYit + θ1 CRISISit
+ θ2 SOCIAL CRISISit + θ3 SOCIAL PARTYit + ηi + δt + μit ð3Þ
where,
ID is the income distribution, measured by means of two variables, these being the Gini
Index and the ratio between the income of the 20% richest and 20% poorest in the
population; SOCIAL is the total spending on social benefits in relation to GDP; WAGE
measures the importance of the pay of salaried staff for the GDP; ITAX measures
indirect tax pressure; Y is per capita income, measured through GDP; AGR is the
importance of agriculture within the GDP; ICL is the Index of Civil Liberties; IPR is the
Index of Political Rights; IEF is the Index of Economic Freedom; IPC is the Index of
Perceived Corruption; NORDIC is a dummy variable which takes a value of 1 if the
country is Scandinavian; MEDITERRANEAN is a dummy variable which takes a value
of 1 if the country is Mediterranean; PARTY is a dummy variable which take the value 1
if the governing party is left-wing; CRISIS is a dummy variable which takes a value 1 if
the year falls between 2008 and 2011; SOCIAL_CRISIS is the interaction between social
welfare spending and the dummy variable CRISIS, which is to say, social spending for
the EU countries is taken into account only during the years of the economic crisis;
SOCIAL_PARTY is the interaction between social welfare spending and the dummy
variable PARTY, which is to say, social spending for the EU countries is taken into
account only when the government is left-wing; ηi collects individual, specific, unob-
served (but constant in time) effects for each country, and δt measures temporary
unobserved effects that are variable with time but identical for all countries.

Results
After estimating the Tobit model with maximum likelihood and the linear model with
FGLS, PCSE and RGMM, verifying the model as globally significant and, in the case
of the GMM estimator, checking that the instruments are valid through the Hansen
Test, we obtained the results we can see in Table 2.
Table 2. Results of the estimations

TOBIT FGLS PCSE RGMM

446
GINI 80/20 GINI 80/20 GINI 80/20 GINI 80/20

Ignacio Amate-Fortes et al.

Constant 28.40*** 5.49*** 32.64*** 5.26*** 31.76*** 5.90*** 27.54** 4.17
(7.92) (5.48) (8.30) (6.21) (8.30) (5.17) (2.53) (1.38)
Social spending –0.099* –0.026* –0.014 0.01 –0.040 –0.007 –0.08 –0.02
(–1.74) (–1.64) (–0.26) (0.91) (–0.65) (–0.40) (–0.55) (–0.41)
Importance of salary 0.011 –0.019 –0.101** –0.04*** –0.095* –0.03** –0.14 –0.04
(0.22) (–1.32) (–2.24) (–3.15) (–1.83) (–2.12) (–0.99) (–1.10)
Indirect tax pressure 0.029 –0.024 –0.12 –0.02 –0.09 –0.03 –0.16 –0.04
(0.34) (–0.99) (–1.38) (–0.84) (–0.86) (–0.85) (–0.53) (–0.50)
GDP per capita 0.000003 –0.000004 –0.00002 –0.000004 –0.00003* –0.00001*** –0.00004*** –0.00001***
(0.23) (–1.36) (–1.49) (–1.41) (–1.87) (–2.85) (–2.83) (–2.76)
Importance of agriculture –0.51*** –0.15*** –0.09 –0.02 –0.14 –0.05 –0.36* –0.09
(–7.42) (–7.58) (–1.00) (–0.86 (–1.29) (–1.52) (–1.76) (–1.31)
Index of Civil Liberties –0.19 –0.16** –0.26 –0.10 –0.33 –0.21** 0.12 –0.05
(–0.86) (–2.49) (–0.93) (–1.41) (–1.00) (–2.18) (0.15) (–0.19)
Index of Political Rights 1.60*** 0.43*** 0.43 0.16 0.44 0.24 3.25*** 0.94***
(3.26) (3.12) (0.73) (0.77) (0.71) (1.08) (2.86) (2.80)
Index of Economic Freedom 0.06** 0.028*** 0.09*** 0.02*** 0.096*** 0.02** 0.17* 0.05*
(1.99) (3.32) (3.01) (3.15) (2.63) (2.27) (1.68) (1.86)
Index of Perception of Corruption –0.22 –0.12** –0.41** –0.11*** –0.21 –0.06 –0.21 –0.10
(–1.25) (–2.42) (–2.47) (–2.63) (–1.09) (–1.15) (–0.44) (–0.74)
Scandinavian countries –4.89** –0.54 –3.14*** –0.47*** –3.69*** –0.57*** –2.69 –0.24
(–2.11) (–0.86) (–4.28) (–2.94) (–4.46) (–2.69) (–1.31) (–0.41)
Mediterranean countries –0.34 0.14 0.41 0.22 0.001 0.19 0.64 0.36
(–0.21) (0.33) (0.75) (1.57) (0.02) (1.09) (0.39) (0.77)
Left-wing government 2.69*** 0.68*** 0.83 0.32 0.58 0.21 2.48 0.68
(3.64) (3.28) (1.00) (1.35) (0.61) (0.70) (1.20) (1.16)
Economic crisis –1.74** –0.16 –1.91* –0.43 –1.25 –0.32 –3.76* –0.65
(–1.98) (–0.66) (–1.84) (–1.46) (–1.05) (–0.83) (–1.80) (–1.12)
Social spending during the economic crisis 0.075** 0.009 0.097** 0.02* 0.07 0.02 0.19** 0.03*
(2.05) (0.92) (2.29) (1.91) (1.37) (1.20) (2.11) (1.65)
Social spending among left-wing governments –0.10*** –0.026*** –0.04 –0.01 –0.03 –0.009 –0.08 –0.02
(–3.16) (–2.82) (–1–15) (–1.39) (–0.75) (–0.72) (–0.94) (–0.87)
Number of observations 432 432 432 432 432 432 432 432
R2 0.77 0.71
Hansen Test 0.88 0.85

*Significant at 10%. **Significant at 5%. ***Significant at 1%.

 Crisis and Inequality in the European Union 447

The first conclusion that one finds on observing Table 2 is that the results do not
vary substantially, whichever estimator is used, nor do they vary with the inequality
variables employed. This enables us to affirm that the model used is robust.
In addition, the R2 is close to 0.77, so the quality of adjustment is good, and the
Hansen Test gives a value greater than 0.05, so that the instruments used in the
dynamic model are valid.
As for the values we have obtained, most cases coincide with what is expected a
priori. In this way, the social policies put in place by governments and measured in
terms of public spending on social benefits do reduce inequalities in income dis-
tribution, although the significant level is very low. This result accords with that
obtained by Afonso et al.,30 in that greater public spending leads to greater equality in
the distribution of incomes. Similarly, Keizer and Spithoven35 conclude that in the
Dutch case, inequality of income diminishes as the welfare state expands and, on the
other hand, Ovaska and Takashima36 maintain that welfare inequality can be
explained in terms of inequality of income, quality of health care and quality of
institutions. Furthermore, as Atkinson37 points out, redistributive intervention in
public spending is justified in terms of aversion towards inequality.
The introduction of the variable that measures the importance for the GDP of
remuneration of salaried workers did not produce any definitive result, given that the
estimated regressor is not significant for all the estimations, but for those estimations
for which the regressor is significant, the negative sign shows that the decrease in the
importance of the remuneration of salaried workers has been experienced in relation
to the gross operating surplus, which has increased the inequality in income
distribution. To the extent that the effect of the indirect tax pressure on income
distribution is not significant, it is not possible to affirm that the regressivity of
indirect levying generates any major inequality in income distribution. In this sense,
the majority of EU countries have established a VAT of varying rates, and this has
had the effect of softening the regressive nature of taxation. In fact, Denmark is the
only country to have a unique rate of VAT. Furthermore, the importance which
special taxes have acquired in certain countries could explain the obtained result.
In the same way, this result does not differ substantially from the study of Afonso
et al.,30 who obtained an insignificant regressor for the direct taxation variable, and
whose sign fluctuated with the dependent function used.
We measured the effect of economic development by means of two variables, GDP
per capita and the importance of agriculture in the economy, and the results obtained
are contradictory. Thus, in the first case, the estimated regressor is negative and
significant in some of the estimations, and so the greater the GDP per capita the more
equitable the income distribution. However, the estimated value is very close to zero.
On the other hand, the regressor obtained to measure the effect of the importance of
agriculture in income distribution is only significant in the Tobit model. In this case,
the negative sign enables us to conclude that economic development, in so far as it
exists, worsens the equality of income distribution. This result is in agreement with
the results obtained by Ravallion and Chen,18 for whom economic growth does not
reduce income inequalities. In addition, Cameron25 maintains that inequality is
448 Ignacio Amate-Fortes et al.

greater in urban areas, along with which economic development, measured in terms
of the diminished importance of agriculture in the overall economy, has a negative
effect on income distribution.
In so far as the effect of the index of civil liberties on income distribution merits
attention, the regression coefficient obtained is negative. Since this indicator (as with
the index of political rights) is defined in such a manner that those nations with a
lower index enjoy greater civil liberties, it implies that those European countries in
which greater freedom of speech, belief and association exist, and that enjoy
secure juridical systems, suffer a greater inequality in income distribution – at least
when we apply the income ratio between the 20% richest and 20% poorest of the
population. According to the Gini Index, the estimated value of this variable is not
significant. However, in the case of the estimated parameter for the index of political
rights, the positive and significant sign allows us to affirm that the greater the
degree of democracy reached by the nations of the EU, the greater the equality of
income distribution. With regard to the impact of economic freedom on income
distribution, the result is positive and significant. In this regard, the liberalization of
commercial regimes, the reduced intervention of governments in the economy,
the free circulation of capital and the freeing-up of the labour market have led
to a major inequality in income distribution. Previously, we pointed out that inter-
vention in the public sector improves income distribution, and so a major liberal-
ization of the economy, logically, increases inequality in the distribution of incomes.
Further, this result supports the thesis of Hall and Ludwig,38 for whom the
more liberal societies do not propose to fight inequality of income distribution. In the
case of corruption, there is only a significant and negative effect on income
distribution in three of the estimations. Thus, when the degree of corruption in a
country is greater, the inequality in income distribution is also greater. In this sense,
Molina et al.39 conclude that those countries that present a higher incidence of
corruption spend less on social benefits, which means that inequality of income
distribution is greater.
Concerning the analysis of the efficiency of the Scandinavian and Mediterranean
models in the struggle against inequality in income distribution, we observe that the
significance of the estimated parameter for Scandinavia, and the non-significance of
the Mediterranean model, enables us to conclude that the Scandinavian example,
which concentrates its efforts on the young population, is more effective in the
achievement of a fairer distribution of income than is the case with the Mediterranean
model, which is founded on social benefits and which is focused on the older
population.
As far as the effect of the ideology of the governing party of each country on
income distribution is concerned, the result is not very significant and positive, so
we cannot state that left-wing governments are the ones who make improvements in
the distribution of income. However, when we combine the social spending and
governing ideology variables, that is to say, when we analyse the effect of social
policy when it is operated by left-wing governments, we observe that the sign change
is negative, but it is not very significant, and so we cannot emphatically conclude
 Crisis and Inequality in the European Union 449

that spending on social benefits is far more effective in the struggle against inequality
of income distribution when it is carried out by left-wing governments.
Finally, we estimated the effect that the economic crisis has had on inequality. The
negative sign, although only significant for the Gini Index, allows us to conclude that,
in principle, the economic crisis through which the European countries have lived
since 2008 has not caused serious income inequality. This result supports the thesis of
Wisman and Baker,31 who argue that the lack of equality in income distribution is
one of the dislocators in the economic and banking crisis, and not one of its con-
sequences, as Atkinson and Morelli32 maintain. However, when we analyse the effi-
cacy of social policies during the present crisis, the positive sign suggests that
governments are redesigning social spending in such a way that the reduction of
inequalities of income distribution is no longer a prime objective. In this sense, it must
be borne in mind that the policy of adjustment being undertaken by the majority of
EU countries is altering the weighting of each benefit within the social spending
budget. Thus, unemployment benefits are taking on major importance because of the
expanding numbers of unemployed Europeans, and the main purpose of this benefit
is to restore, not to redistribute, income.

Conclusions
The results obtained in our study permit us to conclude that both the sample used and
the variables employed greatly enrich the analysis. Despite forming part of the same
economic bloc, the 27 countries analysed offer differences in both their levels of
economic development and the historical, cultural, political and economic experi-
ences which they boast. Added to this, the inclusion of institutional variables and the
effect of the crisis on the analysis of determinants of income distribution in the case of
the EU countries make for very interesting results, as we understand them.
How has the crisis affected the struggle against inequality of income distribution?
To answer this question has been the fundamental aim of this study. The results
obtained enable us to conclude that while the crisis has not necessarily engendered a
worsening in inequality, the response of European governments by means of social
policy has not so far proved effective in achieving a major equalization in income
distribution, probably because inequality has dropped to the status of a secondary
objective, as is reflected in the policies of cuts that most European governments
have applied.
Thus, we can observe differences among the countries. In concrete terms, the
Scandinavian countries have succeeded in distributing income in a more equal way.
This is also the case in those countries in which the remuneration of salaried workers
has lost importance in relation to capital gains. When social policy is designed and
implemented by governments of the Left, more substantial improvements in fair
income distribution are achieved.
Finally, in those countries where a greater degree of democracy has been attained,
and where corruption is combated with greater firmness, and which boast less liber-
alized economies, lower levels of inequality have also been achieved.
450 Ignacio Amate-Fortes et al.

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About the Authors

Ignacio Amate-Fortes was Vice-Dean of the Economic and Business College at the
University of Almeria. Currently, he is Associate Professor at the Department of
Economics and Business of the University of Almeria, Spain. His research fields are
452 Ignacio Amate-Fortes et al.

public economics, inequality, development and international economics. He has

more than 25 publications, with the most recent ‘On the Perpetuation of the Situation
of Economic and Social Underdevelopment in Africa’, in the Journal of African
American Studies, 19(3), 2015. In 2011, Almudena Guarnido Rueda and he received
the VI Unicaja´s Prize in Economic Research.

Almudena Guarnido-Rueda is Associate Professor at the Department of Economics

and Business of the University of Almeria, Spain. Her research fields are public
economics, inequality, development and industrial organization. She has more than
25 publications, with the most recent ‘On the Perpetuation of the Situation of Eco-
nomic and Social Underdevelopment in Africa’, in the Journal of African American
Studies, 19(3), 2015. Together with Ignacio Amate Fortes, she received the
VI Unicaja´s Prize in Economic Research in 2011.

Agustin Molina-Morales is Full Professor of Public Economics at the department of

Economics and Business of the University of Almeria, Spain. He has more than 100
publications, but his most recent publication is ‘On the Perpetuation of the Situation
of Economic and Social Underdevelopment in Africa’, in the Journal of African
American Studies, 19(3), 2015. Currently, he leads the research group ‘Almeria
Group of Applied Economics’.
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