How Sweden can achieve income equality

As Sweden wrestles with a growing gap between low and high earners, liberal commentator Nima Sanandaji looks at which societal problems may be behind Sweden's rising income inequality and why the situation is unlikely to change.

How Sweden can achieve income equality
Why Sweden is doomed for more income inequality

For years, one of the hallmarks of Swedish society has been a high level of income equality. In fact, Sweden and other Nordic nations have widely been acknowledged as having the most even income distributions in the world.

However, a couple of years ago an OECD study pointed out that this picture was changing. The distribution of incomes in Belgium, the Czech Republic and Slovakia were shown to be as equal during the late 2000s as in Sweden, Norway and Finland. In fact, Slovenia had attained the most even distribution of disposable incomes, slightly more equal than Denmark.

As The Local reported recently, a more recent OECD study has reinforced this notion. Whilst the living conditions for most Swedes have improved in recent decades, income differences have grown significantly since the 1980s. A hotly debated issue in Sweden is how this fact should be interpreted. Should we act to create more equality through higher taxes and more government income redistribution?

Granted, the change in income distribution in itself is not a measure of how well a society functions. More important is the underlying question of what causes the change in income differences.

It should be noted that the increase in income inequality in Sweden is partly due to “normalization”. During the 1970s, Swedish politics took a sharp turn towards redistributive taxation, compressed wage distribution, and a heavily regulated economy. These policies were wholly or partially reversed in the following decades, leading to a more uneven distribution of income.

There is a more problematic side to the increase in inequality, however. If a rise in income inequality is caused by an increase in social problems, such as unemployment or other forms of social exclusion, it is obviously a problem. This is partially the case in Sweden. A severe economic crisis in the early 1990s was followed by a sharp decrease in labour market participation rates for many groups and regions.

The latter explanation is not unrelated to the first. When equality is created by taxing wages at a high level, and giving generous handouts, the incentives to work can diminish, leading to lower labour market participation. As shown by a public study from 2004, this was a real concern in Swedish society up until recently.

Families could find themselves in a situation where they would earn little, if anything, should a parent go from being unemployed to working. For single-parent families with children on welfare, the economic incentives of getting a job can still sometimes be slim if any. Creating a reward for work might lead to higher income differences, but still be a welcome change. Not least so if the incentives come from raising the benefits from work rather than cutting the social security benefits.

The optimal situation is where a society can reward striving individuals while maintaining an even income distribution. Interestingly, this was the situation that existed in Sweden during the first half of the 20th century. Already by 1920, well before the creation of the modern welfare state, Sweden had amongs the lowest levels of inequality when compared with other industrialized nations. Swedish economist Andreas Bergh has recently shown that “most of the decrease in income inequality in Sweden occurred before the expansion of the welfare state.” The author concludes that “A number of seemingly unrelated reforms, such as land reforms, school reforms. and the occurrence of unions and centralized wage bargaining, are likely explanations.”

At least from my perspective, the best kind of income equality is achieved by creating good opportunities for a wide rage of groups in society to succeed. This approach is far preferable than attempting to keep those that succeed down through punitive taxation or other regulatory obstacles. During the mid-20th century, Sweden had a society that reached both goals. Today, that goal is harder to reach.

One reason is that entry-level job creation is more limited today, resulting in an “insider/outsider” problem in the labour market. Changes in policies, coupled with technological evolution, have created a situation where labour market demand for those who do not have specialized and knowledge is limited.

Furthermore, the stature of schools in Swedish society has shifted. Being a teacher was one of the most respected professions in Sweden one or two generations ago. Today, those seeking to become a teacher are themselves characterized by low average grades. Also, Swedish schools instill little in the way of discipline. If you are not intrinsically motivated to study, or motivated by your family, you will most likely learn little in the modern Swedish school system.

The problem even stretches to many who gain entry into higher education. In a recent interview with the Expressen newspaper, Krzysztof Bak, who teaches literature at Stockholm University, explained that he has seen a massive deterioration of knowledge among students during the 20 years he’s been teaching.

“The courses we had that were on a B-level during the 1990s are now on a D-level,” Bak explained, referring to classifications used in Sweden since the implementation of the Bolgona Process, with B-level corresponding to advanced introductory level courses and D-level corresponding to advanced graduate-level courses.

The change has occurred simply because upper-secondary school graduates’ knowledge has plummeted over the years.

A sad reason for why Sweden is likely to continue on the path towards income inequality is that many young people are simply not being equipped with basic skills needed in the future labour market. Perhaps we can try to create income equality in such a society by imposing even higher taxes and more generous welfare benefits than today. But introducing such policies, in a country with already such a large welfare state as Sweden, will not be easy. After all, it makes sense to retain some incentives for work.

The best strategy would be to improve the failing education system, so that large numbers of young people are not handicapped by limited knowledge and skills. But sadly the school system, and even higher education in Sweden, has been headed in the wrong direction for many years now. Soon we will begin to see even more dramatic results from the deteriorating school system in a knowledge intensive economy.

The outcomes will be anything but equal.

Nima Sanandaji, a Swedish writer of Kurdish origin with a PhD in polymer technology who has written numerous books and reports about subjects such as integration, entrepreneurship, and women’s career opportunities. He is a regular contributor to The Local.

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‘Swedes need to save to tackle wealth disparity’

Uneven wealth distribution in Sweden can be put down in part to a lack of safe assets among individual Swedes, says liberal commentator Nima Sanandaji, who argues that politicians should encourage people to engage in investments to fight the disparity.

'Swedes need to save to tackle wealth disparity'
Beggar and woman with shopping bags: Shutterstock
French economist Thomas Piketty has gained significant attention for his new book Capital In The Twenty-First Century, recently translated into English after its original publication in French last year. The focus of the book is the issue of economic inequality. One of the main points is that wealth tends to be much more unevenly distributed than incomes. 
Piketty fears that capital amassed during previous generations will grow faster than the economy as a whole, so that a small handful of families end up owning much of the wealth. If this happens, the French economist argues, "the past devours the future".
Much of our knowledge about wealth distribution comes from recent academic studies. And their results are quite shocking. One of the more ambitious studies of wealth distribution has shown that Sweden has the most uneven wealth distribution amongst the seven countries for which data exist. Why is it that Sweden, which has long had an equal distribution of incomes, has an unusually unequal distribution of wealth?
The explanation lies in the fact that many Swedish households have limited or no privately held safe nets.
A report by the Swedish Taxpayers' Association (Skattebetalarna) from 2009 showed that around 30 percent of Swedish households had negative, or zero, assets. Another roughly 20 percent of households had asset levels that corresponded to around one month's salary for a normal household. The low level of household savings in Sweden has likely resulted from a situation where families have relied on the public sector to provide an all-inclusive safety net. However, it never hurts to have some savings in addition to public insurance systems.
Encouraging private savings amongst the broader public is one way to combat inequality. Society can in many ways benefit from a situation where ordinary people control a significant share of the capital. The ability to rely on your own savings, or borrow from friends, for example, increases the possibilities of realizing a business venture. And in the long-run even moderate investments can give a healthy contribution to the family budget.
There are ways for politicians to encourage savings among the broader public. Legislation could for example allow young people to deduct taxes from the first nest egg they save for investments in the stock market, in their first home or in their first business. The first step should be to open up a debate about how a more egalitarian capital ownership can be fostered. 
After all, much of the rise of income inequality in the world is driven by the fact that those with high incomes invest much of their money, and gain long-term incomes from this investment. Shouldn't a political response be to encourage broader groups to engage in investments?
Nima Sanandaji is a regular op-ed contributor to The Local. His latest book is called “Renaissance for Reforms”, co-authored with Stefan Fölster.