Income Smoothing Across EU Regions: a Panel Decomposition of Adjustment Channels

Households across European Union regions face diverse economic shocks impacting wage income and welfare. Understanding the channels through which households adjust their income is crucial for assessing regional resilience. Here we analyze regional (NUTS2) data from 2000 to 2020, decomposing income smoothing into public transfers, property income, self-employment and housing income, and demographic changes. We find that approximately 30% of wage shocks are smoothed in the EU, rising to more than 40% in the euro area and 60% in Western Europe, with transfers and self-employment/housing income as the primary adjustment mechanisms. Property income plays a strong role in Western Europe, particularly during recessions, while migration contributes modestly but significantly to smoothing in Southern and Western Europe. Our analysis reveals distinct regional patterns, delineating core, semi-peripheral, and peripheral groups with varying smoothing capacities. These findings highlight substantial regional heterogeneity in income adjustment, underscoring the multi-speed nature of economic integration and the importance of tailored policies to enhance household resilience across Europe.