INCOME INEQUALITY AND POVERTY IN THE EUROPEAN UNION: CAUSES AND CONSEQUENCES - DNSEU
Project “DNSEU” is implemented within the framework of the National Recovery and Resilience Plan 2021–2026 and is financed by European Union funds through the NextGenerationEU instrument.
Kolluru and Semenenko (2021), based on the World Economic Forum’s 2021 report, identified income inequality as one of the most significant global risks in the coming years, highlighting substantial heterogeneity among European Union (EU) countries with respect to income inequality. Dolls et al. (2019) predict an increase in income inequality in the European Union as a consequence of demographic changes. Palomino et al. (2020) examined the effects of lockdowns and social distancing during the COVID-19 pandemic on poverty and income inequality in European countries. Their findings indicate an increase in poverty across all countries, as well as rising income inequality both within and between countries. Furthermore, macroeconomic determinants of income inequality and poverty remain insufficiently explored in developed economies (Ribeiro et al., 2015). Van Vliet and Wang (2015) pointed out that despite rising employment rates in many European countries, poverty rates remained unchanged or even increased in some cases. Ebbinghaus (2021) highlighted substantial variation in income inequality and poverty rates across European countries. Income inequalities among citizens must be reduced in all EU member states (Follesda, 2023).
One factor frequently associated with income inequality in the literature is financialisation. However, the effects of financialisation on income inequality may vary. Dabla-Norris et al. (2015) explained potential channels through which financial development may affect inequality. It is assumed that income inequality may decrease when domestic credit provision to the private sector is facilitated through lower borrowing costs, leading to increased financial inclusion and broader participation in the financial system. Conversely, inequality may increase when credit expansion is primarily directed toward raising debt levels among existing borrowers rather than expanding access to new participants. Sidek (2021) analysed the impact of government expenditure in 122 countries, finding that in developed economies higher public spending is associated with greater inequality, whereas in developing economies expenditure on education and development is linked to lower inequality. Existing literature, as shown by Pal et al. (2022) and Song et al. (2021), postulates heterogeneous effects of remittance inflows on income inequality. Overall, the literature identifies numerous potential determinants whose effects on income inequality are not unambiguous, including globalisation (Nolan et al., 2019), access to information and communication technologies (Santos et al., 2017), economic growth (Mdingi and Ho, 2021), trade openness (Lee and Lee, 2018), unemployment (Doorley et al., 2021), among many others.
Income inequality and poverty represent layered and highly complex research problems. At the same time, the presence of income inequality and poverty constitutes a barrier to economic growth and generates adverse effects on overall well-being. Consequently, income inequality and poverty are not merely economic issues but broader societal challenges. Existing research clearly indicates a lack of consensus regarding both the factors associated with income inequality and the direction of their effects. Several reasons may explain this lack of consensus, primarily stemming from the inherent nature of the problem. Income inequality is complex in the sense that numerous factors may potentially be associated with it. Such complexity often leads to biased conclusions in empirical research, most commonly due to the omission of one or more relevant factors in a given empirical setting. Conversely, the inclusion of a large number of potential determinants using standard empirical approaches results in problems of over-parameterisation and computational feasibility.
Given the complexity of the issue, the proposed project will employ advanced econometric approaches suitable for situations involving a large number of potential determinants and based on Bayesian statistics. Moreover, the same factors may generate different effects on income inequality across countries and/or geographical regions. Relevant determinants will be identified using Bayesian methods, while the nature of the relationship between identified determinants and income inequality will be further analysed using advanced econometric techniques that provide deeper insights into the interactions between determinants and income inequality or poverty. Determinants of income inequality and poverty will also be examined in a broader context, and the results will be appropriately interpreted in line with relevant theoretical frameworks. The proposed research will be conducted on a sample of European Union member states.
The contribution to the existing literature will consist of new insights into factors associated with income inequality and poverty, as well as the nature of the relationships between identified determinants and income inequality and poverty. The research findings may potentially inform the design of national and European policies aimed at reducing inequality and poverty. Based on the proposed research, the project team plans to write and publish four scientific articles in journals indexed in Scopus and/or the Web of Science Core Collection (WoSCC). Given the strong potential of the proposed topic, the team will also aim to publish more than four articles and will target journals with the highest possible impact factors.
The project “Income Inequality and Poverty in the European Union” directly contributes to the development of research at the Faculty of Economics and Business – Zagreb through several key elements:
The formation of an interdisciplinary research team comprising scholars with expertise in international economics, finance, statistics, and sustainable development;
The establishment of collaboration with international scientific institutions through joint publications and scientific conferences;
The use of project results as a foundation for applications to external funding sources (Croatian Science Foundation, Horizon Europe), thereby strengthening the Faculty’s capacity for future competitive projects;
The development of digital research infrastructure through the creation and maintenance of a database and an internal digital repository for storing research outputs and analytical models.