Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 721: The Long-run Determinants of Inequality: What Can We Learn from Top Income Data?

Jesper Roine (), Jonas Vlachos () and Daniel Waldenström ()
Additional contact information
Jesper Roine: Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
Jonas Vlachos: Stockholm University, Postal: Department of Economics, 106 91 Stockholm, Sweden
Daniel Waldenström: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: This paper studies determinants of income inequality using a newly assembled panel of 16 countries over the entire twentieth century. We focus on three groups of income earners: the rich (P99-100), the upper middle class (P90-99), and the rest of the population (P0-90). The results show that periods of high economic growth disproportionately increases the top percentile income share at the expense of the rest of the top decile. Financial development is also pro-rich and the outbreak of banking crises is associated with reduced income shares of the rich. Trade openness has no clear distributional impact (if anything openness reduces top shares). Government spending, however, is negative for the upper middle class and positive for the nine lowest deciles but does not seem to affect the rich. Finally, tax progressivity reduces top income shares and when accounting for real dynamic effects the impact can be important over time.

Keywords: Top incomes; Income inequality; Financial development; Trade openness; Government spending; Taxation; Economic development

JEL-codes: D31; F10; G10; H20; N30

47 pages, First version: October 16, 2007. Revised: April 1, 2009. Earlier revisions: April 30, 2008, June 27, 2008.

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