SSE/EFI Working Paper Series in Economics and Finance
Inequality Trends in Sweden 1978-2004
() and Martin Floden
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; (follow links to similar papers)
JEL-Codes: D31; D33; E24; J31; (follow links to similar papers)
57 pages, May 20, 2009
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