Income Inequality in the Over-Indebted Eurozone Countries and the Role of the Excessive Deficit Procedure

Abstract

The present study identifies economic, political, and institutional variables that influence the distribution of personal incomes in the Eurozone countries facing severe fiscal imbalances, namely Greece, Italy, Portugal, and Spain. Crucially, this paper is the first to investigate the effect of the corrective arm of the Stability and Growth Pact, the so-called Excessive Deficit Procedure (EDP), on the income distribution of the aforementioned economies, where EDP was imposed over a long time period. The empirical results of this study show that (i) EDP impact depends on the specific mix of policy measures undertaken and that (ii) a high public debt does not reflect the existence of common factors shaping income distribution in the four Southern European economies. The share of labor income in total income, constitutes a significant determinant of income inequality. However, we find that the relationship between labor share and income inequality is also country-specific, depending on the intrinsic characteristics of each individual economic system.