Abstract
Abstract According to standard measures of income inequality, the Nordic countries rank among the most equal economies in the world. This paper studies whether and how this picture changes when the focus is on inequality of income composition, meaning the heterogeneity in individuals’ factor income shares. We show that, for all countries, a shift in capital incomes toward the top since the early 1990s causes rising heterogeneity in individuals’ factor income shares. To explain this result, we highlight the role of dual taxation systems. For Denmark in 2009–2013, Finland (1990–2007), and Norway (1991–2005), rising capital shares contributed to changes in personal income inequality, while for Sweden our results lead to disregard the capital share as a determinant of increasing income inequality.
Highlights
The link between the functional and personal distributions of income has again become a field of interest in recent years
We provide novel estimates on the degree of income composition inequality in Nordic countries in recent decades
We provide a discussion of the potential determinants of these dynamics, identifying the reforms of capital income taxation that took place in the early 1990s in the Nordic countries
Summary
The link between the functional and personal distributions of income has again become a field of interest in recent years. Zucman (2014) and Piketty (2014), predicting that higher capital shares of income in advanced economies (and, correspondingly, falling labor shares, Karabarbounis and Neiman (2014)) would inevitably lead to higher personal income inequality in the decades to come. The study by Bengtsson and Waldenström (2018) broadens the debate by empirically analyzing the relationship between factor shares and income inequality (proxied by top income shares) in the longer run. One of their take-away messages is that the link between the functional and personal distribution of income varies substantially over time and across countries, being contingent on different institutional contexts and production technologies
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