Recent Trends in Income Inequality in Finland

In this study income inequality in Finland was investigated using a decomposition analysis by income group and income source. We have offered some explanations for the recent trends or episodes in income inequality, focusing on changes in employment status, different sources of incomes and the redistributive role of the government budget. Several conclusions can be drawn from the results. Total inequality rose significantly during the latter part of the 1990s. The clear conclusion of decompositions is that variations within groups were far more important in accounting for total inequality than variations between groups. As a general pattern inequality rose proportionately more within those socioeconomic groups with growing capital income shares. In particular among entrepreneurs this share grew most significantly during the 1990s. The results show that capital income although it appears to represent only 17.5 per cent of the total equivalent household income makes by far the most significant proportional contribution to overall inequality. The 1993 tax reform, a socalled dual income tax system, is undoubtedly one of key factors responsible for this trend. Rising unemployment in the early 1990s, perhaps surprisingly, did not increase income inequality. More importantly, the number of the unemployed below the poverty line (50 per cent of national average income) has risen from 1994. Since 1991 there was a declining trend in the average real disposable income of unemployed households. This is without doubt due to those policy measures cutting the redistributive impact of transfers, which have led inequality of disposable income to increase more than that of factor income.