Maria Grazia Pittau

Empirical Evidence of Income Dynamics Across EU Region

 

 

Abstract

 

This paper analyses the distribution of purchasing power standardised per capita income across EU-12 regions between 1977 to 1996. Dispersion of incomes between regions is measured taking into account their population sizes.

The cross-sectional distributions are initially described by weighted kernel density estimates, revealing a multimodal structure of the distributions, less evident over the period. This evidence is supported by a bootstrap test. To detect homogeneous groups of regions, the empirical distributions are approximated by finite mixture of normal densities.

The components of the mixture represent clusters of poor/rich regions, while the mixing proportions the allocation over the poor and the rich components. The number of components is assessed by a bootstrap LR test, while the goodness of fit by a kernel-density-based test.

Income mobility is modelled by the stochastic kernel, the continuous counterpart of the transition probability matrix.

The main implication is a very slow process of catching up of the poorest regions with the richer ones and a process of shifting away of a small group of very rich regions. This evidence is reflected in the shape of the ergodic distribution which is well fitted by a two-component mixture model.

Journal of Applied Econometrics 21, 605--628, 2006.