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Regional income convergence and inequality in boom and bust. Results from micro data in Finland 1971-2000, and especially during the 1990s

  • Heikki Loikkanen

    ()

  • Marja Riihelä

    ()

  • Risto Sullström

    ()

We use micro (Household Survey and Income Distribution Statistics) data to study income differences both between and within four major regions (Helsinki region, Southern, Middle and Northern Finland) during 1971-2000. The former is related to regional income convergence vs. divergence and the latter to inequality at national level and within regions. Besides long-term developments, we are interested in what happened during boom-bust-boom period that began in late 1980s. It included besides economic turmoil also institutional changes ranging from financial liberalization, tax reforms to EU and EMU membership. Also the structure of the economy changed with the rise of IT industry. Micro data based (factor, gross and disposable) income measures indicate that there has been convergence among Finnish regions over time, more earlier and less when we come closer to the end of 1980s. Regional disparities remained more or less the same also in the depression of early 1990s, and increased only slightly in the subsequent boom. As for inequality, the greatest decline in (disposable) income differences since 1971 took place before mid-1980s, thereafter inequality remained pretty much at the same level. Somewhat surprisingly, this was also the case in early 1990s, when output dropped and unemployment increased dramatically. When the recovery began in mid-1990s inequality began to increase rapidly. These developments were surprisingly similar both at national level and at the level of major regions thinking of both time profiles and levels of most typical inequality indicators (Gini coefficients, generalised entropy measures). Only in the recovery period we could detect clear regional divergences as inequality in the Helsinki Region began to increase earlier and to greater extent than elsewhere. Our results also indicate that the Welfare State (transfers and taxation) decreases regional disparities and inequality. We also consider poverty to supplement our analysis of inequality.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa03p514.

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Date of creation: Aug 2003
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Handle: RePEc:wiw:wiwrsa:ersa03p514
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  1. Sala-i-Martin, Xavier, 1994. "Regional Cohesion: Evidence and Theories of Regional Growth and Convergence," CEPR Discussion Papers 1075, C.E.P.R. Discussion Papers.
  2. Sala-i-Martin, Xavier X, 1996. "The Classical Approach to Convergence Analysis," Economic Journal, Royal Economic Society, vol. 106(437), pages 1019-36, July.
  3. Rolf Aaberge & Anders Björklund & Markus Jäntti & Peder J. Pedersen & Nina Smith & Tom Wennemo, 1997. "Unemployment Shocks and Income Distribution How Did the Nordic Countries Fare During their Crises?," Discussion Papers 201, Statistics Norway, Research Department.
  4. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
  5. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  6. Partridge, Mark D, 1997. "Is Inequality Harmful for Growth? Comment," American Economic Review, American Economic Association, vol. 87(5), pages 1019-32, December.
  7. Lerman, Robert I & Yitzhaki, Shlomo, 1985. "Income Inequality Effects by Income," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 151-56, February.
  8. Mookherjee, Dilip & Shorrocks, Anthony F, 1982. "A Decomposition Analysis of the Trend in UK Income Inequality," Economic Journal, Royal Economic Society, vol. 92(368), pages 886-902, December.
  9. Sari Pekkala, 1999. "Regional convergence across the Finnish provinces and subregions, 1960-94," Finnish Economic Papers, Finnish Economic Association, vol. 12(1), pages 28-40, Spring.
  10. Atkinson, A B, 1997. "Bringing Income Distribution in from the Cold," Economic Journal, Royal Economic Society, vol. 107(441), pages 297-321, March.
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