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What Lies Behind the Unprecedented Increase in Income Inequality in Finland During the 1990's

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  • Sullström, Risto
  • Riihelä, Marja
  • Tuomala, Matti

Abstract

This study uses a decomposition analysis of income inequality by income groups and income sources to understand and explain the inequality increase in Finland during the 1990's. Several conclusions can be drawn from our results. Total inequality rose significantly during the latter part of the 1990's. The results suggest that capital income is the most significant contributor to overall inequality in Finland. As a general pattern inequality rose proportionately more within those socio-economic groups with growing capital income share. The 1993 tax reform, a so-called dual income tax system, is undoubtedly one of key factors responsible for this trend. Rising unemployment in the early 1990's, perhaps surprisingly, did not just increase income inequality. More importantly, the numbers of the unemployed below the poverty line (50 per cent of national average income) have risen from 1994. One of the most striking findings of our study is that since 1991 there has been a declining trend in the average real disposable income of unemployed households. The paper also shows that the redistributive impact of taxes and transfers has declined during the 1990's.

Suggested Citation

  • Sullström, Risto & Riihelä, Marja & Tuomala, Matti, 2001. "What Lies Behind the Unprecedented Increase in Income Inequality in Finland During the 1990's," Discussion Papers 247, VATT Institute for Economic Research.
  • Handle: RePEc:fer:dpaper:247
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    File URL: https://www.doria.fi/handle/10024/148149
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    References listed on IDEAS

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    1. Jenkins, Stephen P, 1995. "Accounting for Inequality Trends: Decomposition Analyses for the UK, 1971-86," Economica, London School of Economics and Political Science, vol. 62(245), pages 29-63, February.
    2. Kanbur, S M Ravi, 1982. "Entrepreneurial Risk Taking, Inequality, and Public Policy: An Application of Inequality Decomposition Analysis to the General Equilibrium Effects of Progressive Taxation," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 1-21, February.
    3. Cowell, Frank A., 1989. "Sampling variance and decomposable inequality measures," Journal of Econometrics, Elsevier, vol. 42(1), pages 27-41, September.
    4. Amartya Sen, 1997. "Inequality, Unemployment and Contemporary Europe," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 07, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    5. Shorrocks, A F, 1982. "Inequality Decomposition by Factor Components," Econometrica, Econometric Society, vol. 50(1), pages 193-211, January.
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    Citations

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    Cited by:

    1. Marja Riihelä & Risto Sullström & Matti Tuomala, 2008. "Economic Poverty in Finland 1971–2004," Finnish Economic Papers, Finnish Economic Association, vol. 21(1), pages 57-77, Spring.
    2. Lehmus, Markku, 2014. "Distributional and employment effects of labour tax changes in Finland," Journal of Policy Modeling, Elsevier, vol. 36(1), pages 107-120.

    More about this item

    Keywords

    Inequality; unemployment; income decomposition; Income distribution; Tulonjako; Labour market; Työmarkkinat; Social security; Sosiaaliturva; Taxation; Verotus; Taxation and Social Transfers; Julkisen talouden rahoitus ja tulonsiirrot; C100 - Econometric and Statistical Methods: General; D300 - Distribution: General; D630 - Equity; Justice; Inequality; and Other Normative Criteria and Measurement; H230 - Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • D30 - Microeconomics - - Distribution - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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