Uneven Paths to Prosperity: Club Convergence and Regional Disparities in Income, Inequality, and Poverty Across the EU

This paper employs Phillips and Sul’s (2007, 2009) nonlinear dynamic factor model to discern patterns of EU-27 regional convergence in the standard of living as measured by GDP per capita, poverty and income inequality. It finds that the hypothesis of overall income convergence is rejected at the regional level, whereas that of club convergence is supported. The number and the composition of clubs are significantly influenced by the period considered and the length of the time series. The club convergence analysis of GDP per capita from 2000 to 2023 reveals three clubs, with the largest club comprising regions with a medium level of GDP per capita. After 2007, the clubs' transition paths show a moderate diverging trend: the clubs systematically above (below) the cross-country mean diverge upward (downward) from the mean. Capital regions and metropolitan areas are generally concentrated in the highest club, suggesting a tendency towards polarisation following the urban-rural divide. The likelihood of being part of the high-income club is positively correlated with the share of manufacturing and high-end/high-skill services. By contrast, a large share of the low-skill service sector negatively affects such a likelihood. Additionally, digital transformation, globalisation and migration are all associated with a higher probability of being in the high-income club. Similar to GDP per capita, the hypothesis of overall convergence in income poverty and inequality is rejected, whereas club convergence is confirmed. For both indicators, a higher number of clubs than for income is identified. The transition paths of the two largest clubs—which cover the majority of EU regions—remain relatively stable and close to the mean; however, smaller clubs show strong separating dynamics, either towards higher or lower levels of poverty and inequality. Better labour market and educational outcomes are associated with a greater probability of being in low-poverty and low-inequality clubs and appear better predictors of membership in low-poverty and low-inequality clubs than globalisation and migration. Overall, the paper suggests that the process of EU convergence has not stopped; however, regional dynamics are heterogeneous.