Drivers of Inequalities in the European Union

Abstract

This paper aims to examine the drivers of income inequalities in the European Union. Existing literature suggested a variety of determinants of income inequality. This paper takes into account uncertainty related to the selection of explanatory variables and follows the Bayesian model averaging approach while controlling heterogeneities in panel data by fixed effects specification. Following previous empirical findings and conditions by the availability of reliable data sources, 20 potential drivers of income inequality for 28 EU member countries between 2016 and 2019 were considered in this research. Empirical findings from this research pointed out financialization, human capital index, and adjusted wage share as the most prominent drivers of post-tax income inequality in the short run. Furthermore, the results suggested stabilizing effects of taxation on income inequalities in EU member countries.