Abstract
The economic convergence criteria adopted in the Maastricht Treaty and the fiscal discipline of the Stability and Growth Pact enforced nominal convergence, leaving aside real convergence indicators. In this paper, we use cluster analysis to examine the convergence patterns of income inequality, absolute redistribution (a measure of governments’ effectiveness in correcting for inequality) and unemployment. The expected outcome after years of economic integration was, ex-ante, convergence to a single cluster. Our results, however, uncover a variety of groups, implying that economic integration has not led to real economic convergence. Moreover, the existence of different patterns suggests: (i) that traditional classifications (Anglo-Saxon, Continental European, European Periphery, and Nordic models) remain broadly valid; (ii) that there is no unemployment-inequality trade-off to be exploited in terms of economic policy; and (iii) that the redistributive capacity of governments plays a pivotal role in coping with inequality without negative effects in terms of unemployment.
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Notes
The literature dealing with the interaction between inequality and the labour market has mainly focused on earnings inequality, and the pressure brought by skill-biased technical change in terms of (un)employment and compensation, along the lines of seminal work by Katz and Murphy (1992).
Bouvet (2010) shows that the Cohesion Funds are positively correlated with inequality, although this correlation should not be interpreted as causality. Also, this author also finds that the structural funds are weakly associated with lower inequality.
These conditions imply that the stochastic component declines asymptotically so that the trend vanishes and each coefficient converges to δi.
The inclusion of the US does not change the composition and/or number of clusters involving the Continental European countries. The only difference between the results having, or not, the US in the sample relates to the UK behaviour. In the absence of the US, the UK appears as a divergent economy (not included in any cluster) while, in the presence of the US, the UK appears to converge with this country in terms of inequality and absolute redistribution. This allows the distinction of an “Anglo-Saxon” cluster which outlines the contrast between the “Anglo-Saxon” and the Continental European models in crucial matters such as the behaviour of inequality and redistribution. We thank an anonymous referee for raising the point that the methodology used might be sensitive to the sample composition, and that the inclusion of the US could potentially cause a selection bias. This has led us to confirm the robustness of our results regarding the Continental European countries.
Tables 1 to 3 summarize the information presented in Tables A1 to A8 in the Appendix. More precisely, Tables A1 to Table A3 show the cluster results for the unemployment rates; Tables A4 to A6 show the cluster results for the Gini net index; while Tables A7 to A8 present the cluster analysis for absolute redistribution.
Lack of data prevent us from including Bulgaria and Hungary in the cluster analysis of absolute redistribution. Furthermore, the 1974 data for Gini market in Spain is not available and so the sample now starts in 1975.
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Acknowledgements
We acknowledge constructive comments received from an anonymous referee. Javier Ordóñez is member of the INTECO research Group and gratefully acknowledges the support from the Generalitat Valenciana Project PROMETEOII/201/053 and AICO/2016/38, Spanish Ministry of Economy, Industry and Competitiveness project ECO2017-83255-C3-3-P and the UJI project UJI-B2017-33. Hector Sala is grateful to the Spanish Ministry of Economy and Competitiveness for financial support through grant ECO2016-75623-R.
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Monfort, M., Ordóñez, J. & Sala, H. Inequality and Unemployment Patterns in Europe: Does Integration Lead to (Real) Convergence?. Open Econ Rev 29, 703–724 (2018). https://doi.org/10.1007/s11079-018-9488-x
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DOI: https://doi.org/10.1007/s11079-018-9488-x