Inequality Within the EU-15 Countries: Have Social Benefits Been Pro-poor, Pro-middle Class or Pro-rich?

Abstract

This study utilizes static and dynamic panel models in investigating the impact of social benefits on the aggregate level of income inequality as well as on the income shares of different income groups within the EU-15 countries over the period 1995-2015. While the static panel regression models are estimated with Pooled Ordinary Least Squares (POLS) and Least Squares Dummy Variables (LSDV) techniques, the dynamic panel regressions are estimated using dynamic GMM-IV technique. Diagnostic tests indicate that the results from the GMM-IV technique are consistent and the associated instrumental variables are valid; hence this study gives preference to the results from this technique. The results indicate that social benefits generally have a significantly negative impact on the aggregate level of inequality, a positive impact on the income shares of the low and middle income groups, and a negative impact on the income shares of the high income groups. In the long run, the sign and significance of the parameter estimates remain unchanged but their sizes increase considerably. This research considers a variety of theories and finds that there exists much ambiguity in the theoretical literature. Based on its findings, this study recommends that policymakers address rising income inequality by intensifying efforts towards raising social benefits and ensuring that the welfare system is efficiently managed.