Empirical evidence of income dynamics across EU regions

This paper analyses the distribution of purchasing power standardized per capita income across EU‐12 regions between 1977 and 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 a 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, and 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. Copyright © 2006 John Wiley & Sons, Ltd.