Place-Based Policies and Inequality Within Regions

Against the backdrop of rising inequality across regions, place-based policies have become an increasingly popular tool to support “left-behind” places. While existing research provides evidence for average growth effect of such policies, little is known about their distributional effects within regions. We compile a new panel data set on income inequality across and within regions in the European Union (EU), based on household data from more than 2.4 million respondents of national surveys and covering a maximum of 231 European regions in the 1989-2017 period. These data show that inequality within regions is substantial, tends to increase over time and contributes more to inequality in Europe than inequality across regions. We then study the distributional effects of one of the world’s largest placed-based policies, the EU Cohesion Policy, on household incomes. For causal identification we use, first, a discontinuity in disbursed amounts that results from EU eligibility criteria and, second, a difference-in-differences design. We find an economically substantial, positive effect of EU funds on household incomes that is larger at the top of regional income distributions than at the bottom. The place-based policy increases inequality within regions. To understand the policy’s mechanisms, we differentiate by production factors, sectors, and education levels with macro and micro data and find that these effects are driven by higher labor incomes for more highly educated individuals in multiple sectors. In sum, these results suggest that place-based policies can be effective for reducing inequality across regions but the supported regions tend to lift the incomes of the rich rather than those of the poor.