FACULTAD DE CIENCIAS

ECONMICAS Y EMPRESARIALES

GRADO EN ECONOMA
TRABAJO DE FIN DE GRADO

Ttulo: Inequality in Sweden (1950-2016): A broad view

Autor: Borja lvarez Asensi
Tutor: Antonio Rodrigo Fernndez

CURSO ACADMICO: 2016/2017

CONVOCATORIA: Febrero
 INDEX

1.INTRODUCTION .......................................................................................................................... 3
2. INCOME INEQUALITY................................................................................................................. 5
2.1 Analyzing income inequality ............................................................................................... 5
2.2 Remarks on income inequality .......................................................................................... 11
3. WEALTH INEQUALITY .............................................................................................................. 11
3.1 Analyzing wealth inequality .............................................................................................. 11
3.2 Remarks on wealth inequality ........................................................................................... 19
4. CONSUMPTION INEQUALITY ................................................................................................... 20
5. INEQUALITY AT REGIONAL LEVEL ............................................................................................ 24
6. INEQUALITY ON AN INTERNATIONAL PERSPECTIVE ............................................................... 25
6.1 Income inequality on an international perspective .......................................................... 25
6.2 Wealth inequality on an international perspective .......................................................... 27
7.CONCLUSIONS .......................................................................................................................... 28
REFERENCES ................................................................................................................................ 29

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 ABSTRACT

Inequality is growing today in developed countries more than ever did, society is
asking for answers and solutions to this problem. In this project, I try to show for one
of the most egalitarian countries, Sweden, the evolution of inequality as well as the
policies or economic reasons that has driven it to the actual level from different
perspectives. I test for macroeconomic facts, policies, tax reforms and even cultural
reasons as reasons why inequality increases or decreases. I collect official data from
1950 forward, so the consistency of the analysis is greater. Some of the results are
quite striking as were unexpected, for example wealth inequality in Sweden is one of
the highest within OECD countries. On the other hand, income inequality follows the
premeditated pattern.

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1.INTRODUCTION

Sweden is well known worldwide as one of the most egalitarian countries specifically
in terms of income distribution, as well as on other aspects. This situation comes from
a long way, despite some financial crises and their effects.

Probably one of the most mainstream tools to analyze inequality is P90/P10 ratio, due
to its easiness and how didactic it is. In the following graph, we can see for Sweden
since 1950 how the values have changed. In this case, these ratios are not very steady,
it shows a general picture of inequality in Sweden where income distribution is quite
volatile while wealth is more stable. With ups and downs, inequality in Sweden varies a
lot depending on factors such as economic recessions. Economic crisis obviously had
an impact on inequality, for example during the early 90s, Sweden suffered from an
economic recession and so the impact can be noticed on the graph with a decrease in
the income P90/P10 ratio which means that the bottom 90% of income holders
relatively lost disposable income compared to those placed at the top 10%. On the
other hand, the development of the Swedish welfare state has the opposite effect on
both, the income and wealth ratios, as it can be seen in the graph. As a sneak peek,
inequality in Sweden has changed more due to changing economic features rather
than economic shocks, Sweden has a welfare state quite successful at reducing
inequality and poverty.

Figure 1: P90/P10 ratios of income and wealth distribution

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Development of
Economic crisis
3,5 the welfare state
3
2,5
Wealth
2
Income
1,5
1
0,5
0
1954
1950
1952

1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006

Source: http://www.wid.world/

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The political party that has run the government during the past decades is Swedish
Social Democratic Party (SAP), that can be described as a center-left party. From 1952
to 2016 SAP has been on the government during 47 years, mainly on its own and
sometimes allied with other left parties such as the green party since 2014. The fact
that a social-democrat party has run the government during all this time makes sense
with those public policies implemented in order to maintain a low inequality, these
policies will be explained later on.

A key feature to understand Swedish model is the transfer system, the impact of this is
prominent. Sweden is able to reduce by 46,6% the number of people at risk of poverty
(which is high correlated with income inequality), watch out for the number within the
brackets close for each country in Figure 2. To finance this, it requires a big tax burden,
for example according to WEF in 2014 personal income tax rate was around 56%. In
the upcoming graph we can compare for different countries the effectiveness of
welfare states at reducing poverty, the grey bars show in percentage points the
decrease of risk at poverty, Sweden highlights in comparison to other countries with a
decrease around 46% as one of the most successful at this task.

Figure 2: Risk at poverty (%) before and after social transfers as well as its reduction

35

30

25

20

15

10

0
Norway Iceland Sweden Belgium France UK Germany Euro area Spain Italy
(55,1%) (53,4%) (46,1%) (44,2%) (43,1%) (42,8%) (33,5%) (32,4%) (26,6%) (21,7%)
Before social transfers After social transfers

Source: Eurostat

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2. INCOME INEQUALITY

2.1 Analyzing income inequality

Income inequality is very likely the most common tool in order to analyze and compare
inequality overall. Nevertheless, it has some restrictions, for example it is more
sensitive to median incomes than extreme values, also is not very reliable when
disparities on then income distribution occur. Anyway, it still can provide some
powerful insights into inequality.

First, we are going to take a look at the Gini coefficients of disposable income. Watch
out the grey columns in Figure 3, it points out periods when Sweden suffered from an
economic recession. Along the years, income inequality has increased according to the
Gini coefficients of disposable income. In 1975 Sweden was around 0.2, in the most
recent data, that is 2013 the value of Gini coefficient was 0.33. As we see in the
following graph, the slope of the curve is constant, inequality never stopped growing
except in some short periods of time.

Figure 3: Inequality of disposable income in Sweden: Gini index.

Source: Statistiska centralbyrn

According to Figure 3, we can divide income inequality in Sweden in different periods

in relation to its trend and changes:

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The first period goes from 1975 to 1991, which is characterized by a first low inequality
subperiod and then a second one that sees it to increase. From 1975 to 1988 inequality
in accordance with the data show a relative stability, the value of this index decreases
until the minimum at 0.201 in 1983 and then fluctuates on similar values, therefore no
major changes in inequality. However, in the second subperiod from 1989 to 1991 Gini
coefficients increased showing an increase in disposable income inequality. Some
reasons to explain the decrease in inequality from 1975 are pointed by Gustavsson and
Jordahl (2006) and focus on female labor force and the Swedish welfare state: The
drop in income inequality over time can be explained partly by the increased female
labour supply and by the expansion of social security and the pension system

The second period comes from 1991 to 2001, this age sees an increase in inequality by
13,25%, that is, beginning at levels of 0.25 and eventually surpassing the 0.3 points
threshold reaching the value of 0.313 in 2000. This may be explained by some policies
run by the Swedish government, Bjorklund (2012, p. 52-53) says: The 1990s have
been turbulent in several ways from the income- distribution viewpoint. The recession
with very high unemployment started in 1991, and since then unemployment rates
have been very high by historical Swedish standards. Partly as a consequence of rising
unemployment rates and partly due to educational reforms, the school enrollment
rates among ages 18-25 increased quickly over the 1990s. A large tax reform, with
lower marginal tax rates, broader bases of taxation and higher transfers to families
with children, was implemented in 1991. In the next years, budget cuts with lower re-
placement rates in most social insurance schemes and reduced universal child
allowances were made effective. Further, the rate of inflation fell markedly with lower
discrepancy between real and nominal capital income as a consequence. The economy
changed in several ways and so did the data that are used to analyze income
distribution. First, the broadening of the tax base in 1991 changed the income
concepts in several ways. Second, due to changes in the incentives to sell stock,
realized capital gains were unusually high in 1991 and 1994. And finally, as previously
mentioned, inflation fell markedly with consequences for the content of capital
income. Those policies that took into action during this period were focused to solve
financial issues of the Swedish state, this had a considerable impact in inequality as we

6
can see in the graph because affected directly to social policies that saw their budget
decrease.

From 2001 to 2007 we notice two different patterns, until 2003 is about inequality
decreasing, in contrast from 2004 to 2007 that did it the other way around. In the first
subperiod, the decrease can be explained by previous government decisions, in 1996
Sweden was suffering from a relative high unemployment (8%) as a consequence of
the 90s crisis, so the government stablished a goal of reducing unemployment at 4% in
2000 and created policies to do so. And they delivered it, in 2000 new 90,000 jobs
were created, so Sweden reached their goal, which is the lowest unemployment rate in
recent times. In this case Sweden decreased inequality by market income distribution
instead of public transfers. From 2004 to 2007, unemployment raised slightly and new
immigration flows can be the main reasons to explain the increase in income inequality
Gini coefficients.

Finally, the last period is from 2008 to the present. Inequality during this period has
been steady but above 0.3 in Gini coefficients. It is inevitable to mention the financial
crisis that affected the whole world in 2008, Sweden obviously suffered the
consequences. From 2008 to 2009 and during 2012 Sweden suffered from an
economic depression. Reasons on this slow increase in inequality can be slightly found
on macroeconomic conditions, according to Jonsson, Mood and Bihagen (2016) the
limited increase in poverty and consequently on inequality is mainly related to labor
market dynamism and policies together with automatic stabilizers.

At first sight from 2008 the reader might expect inequality to increase because of the
economic slowdown and increase in unemployment (from 6% to 9%). However, the
increase in unemployment is much lower than in the rest of western countries, plus it
is related to temporary job losses in manufacturing due to an excess of capacity rather
than on permanent job destruction or structural labor market problems. Furthermore,
active policies on labor market and automatic stabilizers played a key role to maintain
stable inequality. However, as the previous mentioned paper, some challenges are still
there for the Swedish government in terms of reducing inequality.

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It is worth to mention a particular fact that cannot be shown with Statistiska
Centralbyrn (i.e Swedish Statistics office) data, due to statistics constraints we cannot
get data before 1975. During 1960 and early 1970 Swedish welfare state developed, it
was the origin of the current entity. As it may be expected and also highlighted by
Bjorklund this had a clear consequence, a decrease in income inequality measured for
example in Gini coefficients.

Another very popular view is to compare income from the deciles perspective. In the
following graph we can notice how Top 10% of the income share, Top 5% and Top 1%
have followed a very similar pattern over the years from 1950. The Top 1% series has
been the only one able to recover and reach the same level than in 1950, in contrast
Top 10% and Top 5% are still a bit below that threshold.

It is quite interesting to analyze the trend of the series and see the impact of economic
crisis on them. Briefly, during economic crisis income the shares of these three groups
increased or at least decreased very scarcely.

Figure 4: Evolution of income share in Sweden

Source: http://www.wid.world/

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We can analyze the previous graph dividing it into three phases. The first one is not
very significant so we do not show it in the graph. It embraces the period just before
1970, the three series show a very mild decrease. Overall, Top 10% of the income
share holds 30% of total income, Top5 and Top1 do around 19% and 7% respectively.

From 1970-1982 coinciding with the development of the welfare state (not the unique
reason) the share of the top incomes decrease following a very similar pattern. In the
case of Top 10% of income share, the decrease is by 23.94%, for Top 5% is 28.14% and
for the top decile, 35.39% during the whole period. We can recall the same arguments
exposed previously in the last graph, the maturity of the Swedish welfare state implied
income being redistributed, the rest (bottom 90%) of the income distribution gained
share at the expense of these top incomes.

Finally, in the period than goes from 1982 to 2013 the top incomes represented in the
figure above increased their share, all of them. During this period, Top 10% gained by
24.89% compared to 1982, Top 5% 37.32% and finally Top 1% were better off by 77%.
The real increase starts around 1991. Top incomes increased their share in the
distribution because of different reasons (similar to those stated above in Gini
coefficients part), among them: immigration, changes within the economy composition
that affected directly to those placed at the bottom 90% of the income share and wage
increases for those with greater education.

Another view on analyzing inequality it is to compare the average income and the
bottom 90% average income, see Figure 5. Both series show a constant increase and a
similar pattern, however from 1995 the average income has developed in a different
way. Average income since mid-90s has grown greatly and more irregularly while the
bottom 90% average income has been flatter. This implies an increase in inequality,
that is, the remaining and Top 10% average income has increased in a greater scale
from 1996 to 2013. This fact makes sense with the following reasons.

Immigration plays a key role in this analysis, Sweden has received great flows of
immigrants (with a peak in 1994 and again from during 2004 to the present). During
the 80s it was about Yugoslavian and neighbors of that country, recently are mainly

9
people from the middle east. The impact is pretty obvious, these types of immigrants
dont own a large income, neither have enough skills or human capital to get a job or
make money to place themselves on the middle class. Thus, the bottom 90% average
income series has seen increased the number of these people and could be a reason
why it has increased at a slower pace compared to the average income.

Other reasons come from changes in economy composition and wage disparities. For
example, metal industry in Sweden has faced new competition coming from
developing countries where is cheaper to produce. Recently Ericsson, a Swedish
telecommunications company decided in 2015 to fire 2200 job places to reduce costs
in order to face competition coming mainly from Huawei. On the other hand, famous
tech firms are expanding such as Spotify or others not that well known as Klarna.
Seems like Sweden is losing employment in the industry and gaining in the service
sector where salaries are bigger. Also, those workers in Sweden with greater
education, according to some researches such as Piketty, have seen their wages
increase, while those at the bottom didnt that much.

Figure 5: Average income vs bottom 90% average income share

300000

250000

200000

150000

100000

50000

0
1968
1950
1952
1954
1956
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1970
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1982
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2008
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2012

Average income per tax unit-including capital gains Bottom 90% average income

Source: http://www.wid.world/

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2.2 Remarks on income inequality

Regarding to transmission of income, we have to point out, that it is notorious at the

top of the distribution, though is not as big as for the wealth case. And the main
explanatory variables are not related to education, but to parents wealth.

In words of Bjrklund, Roine and Waldenstrm (2012, p. 483): We also study potential
transmission mechanisms and find that IQ, non-cognitive skills and education of the
sons are all unlikely channels in explaining the strong transmission. Within the top
percentile, increases in the income of the fathers, if they are related at all, are
negatively associated with these variables. Wealth, on the other hand, has a
significantly positive association. Our results suggest that Sweden, known for having
relatively high intergenerational mobility in general, is a society in which transmission
remains strong at the very top of the distribution and wealth is the most likely
channel.

3. WEALTH INEQUALITY

3.1 Analyzing wealth inequality

Probably alongside the income inequality, the wealth distribution is the most common
tool to study inequality in any country or region. Wealth concentration gives a
different view on inequality, this tool is focused instead on the income that people can
gather along a period of time, on properties (such as houses, land etc.) or firm shares.

The following graph shows the wealth concentration in Sweden from 1966 to 2006 for
Top 10%, Top 5%, Top 1% and Top 0.1%, being represented by top marketable wealth
shares at market values. The pattern is really similar among them, until 1980 there is a
decrease in wealth inequality, from there onwards it rises.

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 Figure 6: Wealth concentration in Sweden (1950-2006)

Data: Roine and Waldenstrm (2009)

We can divide the axis time in two different periods. The first one comes until 1980,
this period runs into the development of the modern Swedish welfare state,
supposedly this fact will have a slight impact in wealth concentration. Then, the second
major period goes from 1980 to the present, the 80s is a key age as will be the time
when capital markets liberalized and became even more globalized.

At first sight, the trend is downwards from the beginning of the series, however the
minimum is concretely around 1980 coinciding with liberalization in financial markets.
Then, the shares of every group increases. Overall, top wealth holders from 1950 have
been losing ground compared to the rest of the distribution.

From 1950 wealth concentration decrease as top share groups see their shares
decrease until the 80s. For example, Top 10% wealth in 1950 gathered the 77.29% of
total wealth, this value decreased along time until around 1980 when the value is just
a bit above 54,5%. Same for Top 5%, its share decreased by 36,65% reaching in 1983
38.4% of wealth share. A similar pattern followed the Top 1% of wealth share, in 1950
the share was 32.81% and later on in 1980 below 20%. In the case of Top 0.1% the

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decrease in wealth share is notorious too, from barely 12,12% to 6.7% suffering a
decrease by 44.72%.

Table 1: Changes of wealth distribution on top of the distribution (1950-1983)

Top Top
10% Top 5% Top 1% 0,1%
1950 77,29 60,62 32,81 12,12
1983 54,5 38,4 17,7 6,7
Change -29,49% -36,65% -46,05% -44,72%
Data: Roine and Waldenstrm (2009)

From 1983 (closest year to 1980 in our collected data) there is a slight increase in
wealth inequality according to our tool. The Top 0,1% of the wealth distribution are
the ones that enjoyed a larger increase from 1983 to 2006, by 7.61%. As is shown in
the data seems that the greater is your wealth, bigger gain in share of the wealth will
be given. The top 1 in 2006 had 18.53% of wealth concentration (increasing by 4,69%).
Finally, Top5 and Top10 raised by 4,11% and 2,50% respectively, reaching each of them
about 39.98% and 55.86% of the share

Table 2: Changes of wealth distribution on top of the distribution (1983-2006)

Top
Top 10% Top 5% Top 1% 0.1%
1983 54,5 38,4 17,7 6,7
2006 55,86 39,98 18,53 7,21
Change 2,50% 4,11% 4,69% 7,61%
Data: Roine and Waldenstrm (2009)

If we analyze it using Gini coefficients during the very recent years we should identify
two clear stages. In the first one the trend is very clear, a little descending from 2000
to 2007 (specifically a 10%) fluctuating between values of 0.83 and 0.88. Then, from
2007 (coinciding with the so well-known as the bubble financial burst and global crisis)

13
this Gini coefficient for net wealth increases by 20%, from 0.83 towards values close to
1, occurring the biggest change during the years 2008 and 2009.

Figure 7: Gini coefficients for net wealth

0,95

0,9

0,85

0,8

0,75

0,7

0,65

0,6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Lundberg and Waldenstrm (2016)

Once we have taken a look at the data and its trend. What are the reasons for these
events? In order to understand how wealth inequality varies there are a few dominant
features that may help us to understand it. Every decile does not own the same share
of assets, for instance, during 2000-2012, around 90% of the share owned mainly real
state, housing and debt. But the top 0,1% percent did own mainly shares, mutual funds
and debt mainly. Thus, depending on the price of these assets and its evolution along
time, wealth inequality measures will change.

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 Figure 8: Composition of wealth across the Swedish wealth distribution

Source: Lundberg and Waldenstrm (2016)

From 1950 to 1980, this is a period characterized by less wealth inequality, for example
a first look at the figure 6 shows that the entire top decile decreases, that means that
those placed at the bottom 90% of wealth distribution gained wealth value at
expenses of the top decile. Despite the decrease in inequality, it is fair to say that the
decrease comes from a long time ago, around 1930. There are mainly two reasons that
explain this according to Roine and Waldenstrom (2009): First, economic shocks from
1930 that had negative effects on top fortunes. Second, new richness among those
who were not that wealthy.

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Now, focusing on 1950 and subsequent years Roine and Waldenstrom (2009, p.16-17)
argue that: After 1950, the trend of increased accumulation continues down the
distribution. The equalization of incomes certainly contributed to this development.
Even as early as in 1950, Sweden had established its position as one of the most equal
countries in the world in terms of incomes, and this trend continued until around
1980. Other sources of continued wealth equalization can be found in the composition
of total wealth. Between 1950 and 1980, the share of owner-occupied housing in total
wealth increases from 17 percent of all wealth to 45 percent in 1975. This was partly
due to increasing values of existing housing (which in turn was partly based on
increased infrastructure investment) but mainly due to new developments of owner-
occupied housing for which the government provided generously subsidized loans. At
the same time, the fraction of rental property as well as that of shares (listed and
unlisted), both highly concentrated in the very top of the distribution, decreased from
17 to 4 percent, and from 14 to 7 percent, respectively. The combined effect of these
changes was an increase in the share held by the nine poorest deciles (P090) from
just above 20 percent in 1950 to around 45 percent in 1980, with a corresponding fall
in the share held by the richest decile (P90100). The decrease in wealth inequality is
based on two major aspects: increase in price of housing, motivated by government
loans to own a house and equalization of incomes.

From 1980 to 2000 the trend goes backwards, wealth inequality increases. And what
are the reasons according to Roine and Waldenstrom?. First, it depends on
fluctuations of price shares, if these prices or the value of shares increase,
consequently wealth inequality increases. During these years (during 1980, in Sweden
the peak was on 1989) took place the phenomenon called financial market
liberalization. Therefore, price of shares and value of mutual funds raised, increasing
consequently the wealth of those who owned these type of assets, mainly those on
the top of the wealth distribution. Anyway, the changes that can be observed on the
graph or the data may be slightly misleading, because according to these researches,
official statistics do not capture some phenomenon such as economic outflows
(happened after financial liberalization) made by wealthy taxpayers avoiding relative

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high tax rates in Sweden and motivated by less hindrances. Despite the lack of
resources to measure this fact, researchers claim to take this into account. Second, it
depends also on housing prices, as it will be explained later on (because the effect was
greater), an increase in housing prices makes wealth inequality decrease.

During the period 2000-2007 seems reasonable to think that wealth inequality
decreased because an increase in the value of assets owned mainly by the bottom 90%
of the wealth distribution, or at least a real decrease in the Top 10%. At least there is
some evidence of an increase in housing prices in Sweden during this period of time,
see Figure 9. From 2000 the increase in housing prices is remarkable, while from 2007
it becomes a bit flatter. A similar pattern may have followed real state or bank
deposits.

Figure 9: Sweden house price average (1992-2016)

Source: (Zerohedge.com, 2016)

The inflection point comes in 2007 as can be seen in Figure 7. The financial global crisis
has a lot to do here, it is a really powerful explanatory variable. In words of Lundberg
and Waldenstrm (2016, p.3) Decomposing the increase suggests that it is in part due
to widening gaps in the housing market, especially tied to the booming values of
unequally held apartments, and in part to a more skewed distribution of bank savings.
() The top wealth shares increased less than the Gini coefficient, underlining that it is

17
largely on the housing market, that we detect the main driver of increased inequality.
In addition, to support this view same researchers claim that comparing capitalized, or
rather hybrid stocks to wealth inequality estimates show a very similar pattern.
However, if this is done with pure capitalized is the other way around, implying
significant amount of non-interest paying accounts (checking accounts) and that
interest rates tend to vary across a number of dimensions (banks, individuals, account
type, deposit size etc.. In other words, those who gathered larger amounts of money
had the chance to enjoy higher interest rates in deposit banks and financial products,
while those with less wealth assets got zero or really low interest rates. Furthermore
the rich were able to do portofolio reallocation in order to switch from risky to safe
assets, so they wouldnt lose money. Some reforms once the government changed
from a center left party to a center-right political party are believed to have
contributed to increase wealth inequality, example of this policies is mentioned by
Lundberg and Waldenstrm (2016, p.1): removing the progressiveness of property
taxation and extending tax breaks for profit distribution for small business owners.
Also, the increase in housing prices that took place during this time was mainly focused
on housing owned by those at the top of the wealth distribution, contributing to more
wealth inequality. But probably the most decisive reason is the removal of the wealth
tax as well as residential property taxes and inheritance tax, motivating the
accumulation of wealth at the top of the distribution from different sources, from
motivating big investments but also inducing people to accept bequest instead of
rejecting them because of associated costs related to taxation.

Finally, we have to point out that from 2007 the government decided to stop collecting
data from wealth positions because they decided to remove the tax, so the data from
2007 is based on models and predictions carried by the mentioned researchers. Also,
from 1980 the data is not that reliable as it was before, due to capital outflows that
took place once the financial liberalization occurred. Anyway, a great statistical effort
has been done to replicate as faithful as possible the data for the Top 10% of wealth
holders (those more likely to skip wealth taxation).

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3.2 Remarks on wealth inequality

We have analyzed wealth distribution along the years, but what about its persistence?
Wealth transmission through descendants seems to be notably strong, that means that
those families placed at the top distribution of wealth are still there through the
decades, mainly because inheritances. In words of Black, Devereux, Lundborg and
Majlesi (2015, p. 1): Our findings suggest that wealth transmission is not primarily
because children from wealthier families are inherently more talented or more able
but that, even in relatively egalitarian Sweden, wealth begets wealth.

Using what they call a Within-Cohort Wealth Rank Relationship between Parents and
Own-birth Children these authors examine if wealth remains in the same families
from generation to generation, and it proves to be right according to their results.

In comparison with income intergenerational transmission, wealth it is even stronger

at the top of the distribution.

Tyler Cowen on a Marginal Revolution post also covered this phenomenon based on
some papers. According to Cowen (2014): The intergenerational mobility of top
wealth is chokingly low. A recent study found that an astonishing 80-90% of inequality
of top wealth is transmitted to the next generation in Sweden.

According to one study the share of the richest Swedes who inherited their wealth is
around 2/3, with 1/3 being entrepreneurs, while in the United States it was the
opposite, with 1/3 of the wealthiest inherited their wealth while around 2/3 are
entrepreneurs.

Also, according to Piketty and Zucman (2014, p.16): about 2030% of national wealth
has been redistributed away from the top 10% to the bottom 90%. Since most of this
redistribution benefited the middle 40% (the bottom 50% still hardly owns any
wealth), this evolution can be described as the rise of a patrimonial middle class.

In 2005 the inheritance tax was removed, in 1983 it reached 70% of tax rate and in the
year previous to its removal (2004) was 30%. The main reasons for the existence of this
tax are based on issues of fairness and wealth redistribution, the revenue from this tax
was in 2004 about the 0.15% of GDP. The reform was carried by Social Democratic

19
government after a remarkable public debate, as well as some viral cases of
entrepreneurs who left the country (e.g. IKEA founder) or decided to turn into
foundation in order to repel the tax. The parliament decided to review and evaluate
this tax together with wealth tax and eventually in 2005 it was removed. The effects
according to Ydstedt (2016) are: The [average] tax ratio declined from 51% of GDP in
2000 to 44% in 2014, even as tax income increased by SEK 260bn, adjusted for
inflation. However, in terms of fiscal policy the revenues generated by inheritance tax
have not been offset by the increase in tax income revenue. Approximately, from 2000
every year 258.237,887 SEK are missed. However, Swedish government may have
decided to remove this tax because efficiency reasons together with the many surplus
they have registered in the last 20 years. Maybe it is still too early to conclude any
effect of this decision, as we lack the required data, but the main effect is expected to
be more wealth transmission. Costs of receiving a bequest were bigger for those
poorer as they couldnt use fiscal tricks.

4. CONSUMPTION INEQUALITY

A third different perspective on inequality analysis is called consumption inequality.

We can define this sort of analysis as the differences of purchasing power among
individuals. This view gives a greater insight into living conditions and differences or
inequalities among the members of the economy.

For Sweden, we can see in Table 3 how consumption inequality has developed from
1980 to early 2000s. Consumption inequality has decreased, as we can see in the table
the lowest pentiles have increased more, from 0 to 40% of the total share, purchasing
power has increased or at least remained the same. The Top 10% has decreased their
level of expenditures by 0.5 percentage points. While those in the rest of the
distribution has an unclear outcome, from 40% to 75% of the share they lose from 0,1
to 0,3 percentage points, then those between 75-90% gained 0.4 points in total.

In words of the Daunfeldt, Flster and Hortlund (2010, p.7-8): The upper half of the
income distribution decreased its share of total expenditures by 1.4 percent, while the

20
lower half increased its share correspondingly. The main result is therefore that
despite the increase in income inequality, consumption inequality has certainly
decreased in Sweden during the study period.

The increased consumption equality between 1988 and 200305 also seem related to
the age distribution. Households with members younger than 45 years of age had, on
average, higher expenditures than disposable income in 1988. Households with older
adult members seemed, on the other hand, not to consume all their disposable
income.

The age distribution of disposable income and expenditures are very different in 2003-
05 compared to the pattern displayed in for 1988. In contrast to the results in 1988,
young adults (under 30 years of age) tend to consume more than their disposable
income; whereas older individuals tend to save a large part of their income.

Table 3: Shares of pentiles regarding disposable income and total expenditures (1983
and average 2003-2005)

Source: Consumption and inequality in Sweden Daunfeldt, Flster and Hortlund

21
Why consumption and income inequality follow these different trends? According to
Daunfeldt, Flster and Hortlund (2010) it is due to more consumption smoothing over
short-term income fluctuation, more lifecycle redistribution, and changing patterns of
unreported income.

Compare the slope of the blue lines representing expenditure (consumption obviously
too) in Figures 10 and 11. Comparing 1988 to 2003-2005, the expenditure line is more
stable and a bit flatter, people tend to consume less in relation to its income.

In line with the authors view, consumption has smoothed compared to the past due to
several reasons. First due to the development of financial institutions, less borrowing
constraints together with lower saving penalties that make saving more attractive and
therefore consumption smoothing. Furthermore, other reasons are given, for example
reduction in unemployment benefits as well as the duration of them.

Finally, researches grab attention to unreported income as a source of mistakes while

analyzing income inequality, mainly because tax avoidance or unreported income in
the low pentiles that is not captured by official tax returns (for instance allowances and
stipends). So, it could be more interesting and actually a more accurate tool, to analyze
inequality through consumption inequality rather than income inequality in order to
get rid of these problems.

*Note: In figures 10 and 11 the purple line corresponds to disposable income and the
blue line to total expenditures

22
Figure 10: Distribution of disposable income and expenditures for Swedish
households according to average adult household age, 1988

Source: Consumption and inequality in Sweden Daunfeldt, Flster and Hortlund

Figure 11: Distribution of disposable income and expenditures for Swedish
households according to average adult household age, 1988

Source: Consumption and inequality in Sweden Daunfeldt, Flster and Hortlund

23
5. INEQUALITY AT REGIONAL LEVEL

On a more detailed perspective we can analyze inequality at regional level, in the case
for Sweden at the county level. The different regions in Sweden are called Counties
and these 21 regions vary enormously on size and population, these features have
some presumably impact on inequality among them. But first take a look at the data.
Income inequality measured by Gini coefficients seems the easiest and didactic tool to
get an insight into inequality among Swedish counties, as it is shown in Figure 12.

There are a few regions that stand out, these are Stockholm, Uppsalsa and Skane all
well above of the 0.25 ceiling in both years. On the other hand, Norrbottens,
Vsterbotter and Vsternorrland as the more income equalized regions. Why these
regions own such levels of relative high or low income inequality? In the following lines
we deliver some ideas on it.

Figure 12: Gini coefficients for income at regional level in Sweden (2012 and the
average of 1994 and 1998)

0,31
0,29
0,27
0,25
0,23
0,21
1994-1998
0,19 2012
0,17
0,15

Data: Gustavsson and Jordahl (2006). And Statistiska centralbyrn

Despite some changes in the composition of Swedish counties, that is a merge during
1997 and 1998 we have decided to stick with the sample of 21 regions. Before 1997 in

24
Sweden existed 24 counties, for political reasons some of them merged, for instance
Kristianstad and Malmhus counties became one, Skne.

According to Gustavsson and Jordahl (2006) the largest decrease in inequality between
1960 to 2000 occurred mainly in northern regions, a decrease by 29%. While those
counties most populated had a lower decrease in inequality, around 14%. From 1960
not only the degree of descending inequality has changed but the position in inequality
rankings too. Regions that were more unequal in 1960 turned to be the most equal in
terms of income in 2000. In contrast, crowded counties such as Stockholm became the
one with most unequal distribution of income, same for the other regions with big
cities.

The reasons for these incidents according to Nahum (2005, p.12) are: The differences
across counties may depend on factors such as differences in age structure, in
education levels, in the initial industry set-up leading to more or less favorable
infrastructure. These differences could give rise to differences with respect to the
volume and variation of transfer payments across counties over time. Similarly,
counties may also differ with respect to how they adjust to tax reforms.

6. INEQUALITY ON AN INTERNATIONAL PERSPECTIVE

6.1 Income inequality on an international perspective

Embracing all the countries on our analysis is quite complex and it will give no room for
a proper analysis. So, in order to give a better insight on inequality in Sweden in
comparison with other countries we are going to select Iceland, Germany, Spain, USA
and Japan.

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 Figure 13: Gini coefficient of disposable income inequality in 2014 (or latest year)

0,450

0,400

0,350

0,300

0,250

0,200

0,150

0,100

0,050

0,000
Iceland Sweden Germany Japan Spain United States OECD

Data: OECD

In comparison to other countries, as it may be expected Sweden is placed at the

bottom of income inequality. Although is still far from the top bottom, which is held by
Iceland by 0.037 Gini coefficient points, it shows how Sweden has earned a place
among those countries with low inequality.

Within the Scandinavian countries, Sweden is the one that performs the worse,
however within a OECD comparison is just the opposite. United States in our graph is
the country most unequal related to income, almost half of a point ahead of Spain and
one Gini coefficient point of Germany. In the middle is Japan that in 2014 registered a
0.33 Gini coefficient.

On a quick remark, we can state that Sweden enjoys such a low level of income
inequality due to a welfare state that corrects relative low market inequalities, based
on high taxation in order to redistribute and have successful equality policies. On the
other hand, a dynamic labor market that has a relative low unemployment rate and
low long-term unemployment too allows people not to fall in poverty in such
magnitude as in Spain or countries with dysfunctionalities in the labor market. There is
no country (except the Nordic countries) that follows the same system, what is called
flexicurity that is flexibility on a dynamic labor market and a welfare state that

26
ensures low levels of poverty and inequality, so people do not fall into a poverty trap.
In the case of Spain, none of the two conditions are held, in the case of US just the
flexible labor market etc. Briefly, flexicurity is the reason why Sweden shows low levels
of inequality.

6.2 Wealth inequality on an international perspective

Wealth inequality tells a different story, in this case Sweden is not a country with
wealth equally distributed, at least in comparison to the rest. In our selection of
countries is the second one with wealth more unequally distributed according to
wealth Gini coefficients, just behind of the USA. While countries such as Spain or Japan
have lower levels of wealth inequality.

It could make sense that he countries with greater household property are those with
lower level of wealth inequality, Spain for instance. On the other hand, Sweden relies
relatively more on a rental system mainly on Stockholm and the rest of metropolis. The
home-ownership rate in Sweden is 70.6%, a few points lower than in Spain (78.2%).
Ownership of stocks and firm shares may have a big impact on wealth inequality, but
we lack of that data.

Figure 14: Gini coefficients of wealth distribution (2014)

0,9

0,8

0,7

0,6

0,5

0,4

0,3

0,2

0,1

0
Japan Spain Iceland Germany Sweden United States

Source: OECD

27
7.CONCLUSIONS

Analyzing inequality is not an easy task, there is not a unique and ultimate tool or
procedure in order to understand and have an insight in inequality as it happens in
other fields. Depending on the tool we are using, we will get a different perspective or
even contradictory results in comparison with other tools. So, to analyze inequality
properly, we have to use different analytic tools and get a broad picture of it.

To analyze inequality in Sweden I have used mainstream analytic tools as well as some
specific that suited with my interests. The results were quite surprising, Sweden is
known a one of the most egalitarian countries, income inequality proves that.
However, a deeper analysis shows that when it comes to wealth inequality it is the
other way around. Furthermore, income inequality is not that lower compared to
countries such as Belgium.

So, inequality in Sweden is lower than in most of developed countries, that is true, but
the strength of Sweden system relies on how little income inequality varied across
time in the recent decades. Mainly due to low unemployment and good salaries, so the
welfare state can focus on concrete policies such as (natality, education etc.) and
spending a little share of the budget on balancing incomes (for example through
Earned income tax credits).

Wealth inequality pattern cannot be expected to change soon, the reasons that have
driven to these levels of wealth inequality are going to be still there in the coming
years. The main reason for this is the low rate of house ownership, and recently it is
necessary to add the low interest reported by saving accounts and financial products
for those at the bottom of wealth distribution.

Consumption inequality is an interesting perspective to analyze inequality, though the

access to this type of data is complex. It provides more accurate information, as it does
not ignore important forms of income such as scholarships or other types of income
unreported by tax reports.

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