Income inequality and redistribution in Scandinavian countries

Abstract

This paper investigates the adjustment of government redistributive policies in Scandinavian countries following changes in income inequality over the period 1980-2021. We use two complementary measures of inequality: the share of total income accruing to top percentile income holders, as well as the ratio of the share of total income accruing to top decile income holders divided by that accumulated by the bottom 50%. We find that the sign of the relationship between inequality and redistribution is mostly positive and time-varying. We also find significant evidence that redistributive measures in the form of taxes and government transfers adjust more rapidly in an upward than a downward direction, with the exception of Norway. We obtain a significant long-run relationship between both variables in Iceland and Sweden, while in Norway it just holds for the short run.