Inequality Trends in Sweden 1978-2004

David Domeij () and Martin Floden ()

No 720, Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: We document a clear increase in Swedish earnings inequality in the early 1990s. Inequality in disposable income and earnings net of taxes and transfers also increased, but much less than the increased inequality in pre-government earnings. These different developments are most likely explained by the generous Swedish welfare system. Consistent with these observations, we see no clear trend in consumption inequality. We also estimate stochastic processes for household earnings. A simple random-walk process captures much of the life-cycle dynamics. But we find clear evidence that the true earnings process is not a random walk. We demonstrate that some estimation methods result in severe upward bias in the estimated volatility of permanent shocks if serial correlation in temporary shocks is ignored. Our estimation results show that the increase in earnings inequality is almost entirely driven by an increase in residual earnings inequality. Moreover, this increase was mostly generated by an increased volatility of persistent shocks.

Keywords: income inequality; consumption inequality; stochastic earnings process (search for similar items in EconPapers)
JEL-codes: D31 D33 E24 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec
Date: 2009-05-20

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Persistent link: http://EconPapers.repec.org/RePEc:hhs:hastef:0720

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