This paper examines how stable national disposable income inequality can coexist with substantial local reconfiguration in spatial inequality within a small, open, and highly integrated economy. Focusing on Luxembourg, where strong commuting flows and a nationally uniform tax-benefit system limit sub-national institutional variation, it analyses how demographic change, labour market restructuring, and redistribution shape municipalitylevel inequality between 2011 and 2021. The paper develops a spatial microsimulation framework that combines EU-SILC microdata, Census aggregates, and the EUROMOD taxbenefit model to recover local distributions of disposable income where representative small-area income data are not directly available. This framework enables the joint analysis of market income generation and redistribution at a fine spatial scale and is transferable to other countries operating within the EU-SILC-EUROMOD architecture. Three findings emerge. First, inequality is driven mainly by disparities within municipalities rather than between them. Second, although disposable income inequality is spatially clustered, this clustering weakens significantly over time. Stable national inequality conceals substantial local heterogeneity: inequality declines in Luxembourg City and its urban belt, but rises in the southern industrial belt, the northern region, and the remaining municipalities. Third, counterfactual decompositions show that demographic change tended to increase local inequality outside the urban core, while labour market change and the tax-benefit system offset part of that pressure. The results show that aggregate distributional stability can conceal substantial local change in spatial inequality.
