Below are six policy recommendations drawn by the editors of the Nordic Economic Policy Review 2018: Professor Lars Calmfors from the Research Institute of Industrial Economics and Institute for International Economics at Stockholm University and Professor Jesper Roine from Stockholm Institute of Transition Economics at the Stockholm School of Economics.
The recommendations can also be found in the introductory chapter of the review which can be downloaded through this link: Increasing Income Inequality in the Nordics
1. Less redistribution has been an important cause of more relative poverty in the Nordics. This has been a consequence mainly of a reduction in redistributive cash transfers following from a slow up-rating of such benefits in line with wages. Reductions in unemployment benefit and sickness benefit replacement rates have strengthened the incentives for employment, but the overall effects are likely to have increased inequality. If one wants to prioritise equity objectives, it is important to prevent further downward slides in benefit replacement ratios. This could involve difficult trade-offs with efficiency objectives. Such trade-offs are, of course, less severe with general cash transfers not directly linked to non-activity, such as child or housing allowances. Although lack of indexation of various social benefits to wages may be advantageous from the point of view of long-run fiscal sustainability, it may be problematic for income distribution developments (see, e.g., Swedish Fiscal Policy Council 2011).
2. Public in-kind transfers through the provision of government welfare services at low or zero costs have been shown to decrease income inequality substantially. At the same time, there is an ongoing discussion on the long-run sustainability of public finances against the background of an ageing population and (likely) increased demand for welfare services as incomes grow (the Wagner effect; see, e.g. Bergh 2016 and Ekonomiska vårpropositionen 2017). It is often argued that this will put public finances under increased strain and that more welfare services must therefore in the future be financed through user charges. According to the analysis in the volume, such changes are likely to have large inequality-increasing effects. They should be avoided if one places a large weight on income distribution objectives.
3. Pensions are generally lower than incomes from work. An ageing population will therefore tend to increase income inequality as measured by the distribution of yearly incomes. It is not obvious that this should be seen as a problem as lower pensions relative to work incomes do not change the distribution of lifetime incomes. At the same time, we know, at least from Sweden, that income inequality is larger among pensioners than in the rest of the population (see Ekonomiska vårpropositionen 2017). Indexation of the retirement age to longevity might be a way of mitigating problems with very low pensions, although, of course, other trade-offs will be involved. In addition, for pensioners the generous provision of public in-kind transfers makes an important contribution to reducing negative welfare consequences from having low cash income, as discussed above. Maintaining the level and quality of these in-kind transfers may be at least as important as reducing income inequality for this group.
4. Increased top-income shares have made significant contributions to the overall increase in income inequality in the Nordic countries. The cause has been a larger importance of capital incomes, which are more unevenly distributed than labour incomes, and a widened distribution of capital incomes. If one wants to counteract the increase in the top-income share, this would seem to require changes in the taxation of capital income and wealth. The tax reforms in the 1990s in the Nordics involved the introduction of dual income tax systems with lower (nominal) tax rates for capital income than for labour income. Effective tax 14 Increasing Income Inequality in the Nordics rates on real (inflation-adjusted) capital incomes have subsequently fallen through lower inflation. Corporate tax rates have been decreased. Inheritance and wealth taxes have been abolished or reduced. Current real estate taxes are low in all the Nordic countries. It follows that changes in these various taxes should be contemplated if one wants to counteract the increases in top income shares. This may indeed be quite important if one wants to promote social mobility, as inherited wealth may lower such mobility. In addition, the introduction of the dual tax system (and other related tax rules) have created incentives to convert labour income into capital income (see, e.g., Pirttilä and Selin 2011, and Alstadsæter and Jacob 2016). Restricting the possibilities to do this would likely contribute to a more even income distribution. When contemplating changes in wealth taxation, and especially real estate taxation, it is, important to consider the “cash-flow restriction” of households. The increases in asset values (in particular real estate values) imply that many households have substantial wealth, whereas their income flow consists mainly of labour income (often taxed at a high marginal rate). Taxing assets more heavily, including in particular housing, may therefore force sales of assets in a disruptive way. If the balance is shifted from taxation of labour income to taxation of capital, these risks need to be addressed.
5. Education and training efforts (including for adults) may be crucial for the integration of immigrants in the labour market and this way help alleviate poverty among this group. Successful education efforts have the advantage that they can alleviate potential equity-efficiency trade-offs by contributing both to growth through investment in human capital and to decreased inequality (to the extent that they target weak groups and are efficient). Education policy is not, however, likely to have much effect on top-income shares, since they are not strongly related to differences in education (see, e.g. Björklund et al. 2013).
6. Finally, the analysis of gender aspects of income distribution in the volume suggests that policies reducing gender differences are likely also to contribute to reductions in overall income inequality. The analysis also points to the possibility that some features common to the Nordic welfare states may have adverse effects on the possibilities for women to reach the top of the distribution. Research shows that much of remaining gender differences relate to women having children (see, e.g., Angelov and Karimi 2012, and Kleven et al. 2018). Policies that reduce these “child penalties” for women are likely to reduce the gender gap. Such policies could, for example, include making parental leave less generous (thereby lowering employers’ expectations of career disruptions) or equalising (expected) parental leave between men and women by dividing these rights more equally between the parents.