Inequalities, employment and income convergence in Europe: evidence from regional data

This paper explores the relationship between pay inequality and unemployment rates for 187 European Regions from 1984-2003. We measure inequality within the regions between 16 industrial sectors in each region - and also between the regions: thus, the inequality measures are nested. Our model of unemployment employs a panel structure that permits us to separate regional, national and continental influences on European unemployment. This allows us to test whether a tradeoff exists between cohesion and competitiveness. We find no evidence of this tradeoff; instead, lower pay inequality is generally associated with a lower regional unemployment rate. We find strong country effects lowering unemployment (relative to the model) in relatively smaller countries such as Ireland, Austria, Portugal and the Netherlands; on the other hand unemployment is high, relative to the model, in Spain and Poland. Time effects reveal the effects of European macro-environment on regional unemployment. We find an employment penalty associated with the Maastricht Treaty (1992) and its implementation of around four percentage points, lasting until 1998, when a general reduction in unemployment appears to coincide with the arrival of the euro. Unfortunately, the pattern is again reversed in 2000, coinciding with the implementation of the Lisbon Treaty. The analysis has grave implications for the consequences of the crisis of 2008 and after, although data on this period will not become available for some time.