National Stability, Local Reconfiguration: Demographics, Labour Markets, and Redistribution in Spatial Income Inequality

This paper examines how stable national disposable income inequality can coexist with substantial local reconfiguration in a small, open, and integrated economy. Focusing on Luxembourg between 2011 and 2021, it analyses how demographic change, labour market restructuring, and redistribution shape inequality across municipalities. We develop a spatial microsimulation framework combining EU-SILC microdata, Census aggregates, and EUROMOD to recover local disposable income distributions where representative small-area data are unavailable. Three findings emerge. First, inequality is driven mainly by disparities within municipalities, not by differences between them. Second, although disposable income inequality is spatially clustered, clustering weakens over time. Stable national inequality conceals divergent local trajectories: inequality declines in Luxembourg City and its urban belt, but rises in the southern industrial belt, the northern region, and other municipalities. Third, counterfactual decompositions show that demographic change increased local inequality outside the urban core, while labour market change and the tax-benefit system partly offset this pressure.