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Poverty reduction and the tackling of social exclusion are overarching goals of development and welfare policies. This paper explores the extent to which decentralisation contributes to poverty and social exclusion alleviation in European countries and regions. We find evidence that increases in central government transfers of political, administrative, and fiscal authority to subnational tiers of government reduce poverty and address social exclusion at an aggregate level. This, however, mainly happens in countries with a high degree of governance quality and, fundamentally, in urban areas. The link between decentralisation and poverty and social exclusion alleviation is more uniform at the regional level, as greater regional autonomy is connected to lower poverty and social exclusion, regardless of the quality of regional government. Hence, when regional governments have the capacity to design their own independent policies, a reduction of poverty and social exclusion and improvements in well-being generally ensue.

The paper provides an empirical study of the determinants of income inequality across regions of the EU. Using the European Community Household Panel data set for 102 regions over the period 1995-2000, it analyses how microeconomic changes in human capital distribution affect income inequality. Human capital distribution is measured in terms of both human capital stock, as well as human capital inequality. Income and human capital inequalities are calculated by a generalised entropy index (Theil index). Different static and dynamic panel data analyses are conducted in order to reduce measurement error on inequalities and minimise potential problems of omitted-variable bias. The regression results suggest that, in the short term, human capital inequality is negatively associated to the average regional income and the average level of education of the population. The results also highlight that a highly unequal distribution of education level completed is associated to lower, rather than to higher inequality, highlighting the effectiveness of the European social system or, from a different perspective, the lack of responsiveness of EU labour market to differences in qualifications and skills. Additionally, high unemployment is associated with higher income inequality, while urbanisation has the opposite effect.