Topic 4: Dealing with the problem of increasing income inequalities – the case of Sweden

In many countries, income gaps are increasing, Typically, the already very rich tend to become
richer while real incomes for the poor and the middle class tend to be constant or even
decrease. This development is problematic for several reasons. Analyze using relevant
microeconomic theory the with increasing income inequalities in Sweden and discuss potential
solutions.

1.0 INTRODUCTIONI

Income inequality refers to the distribution of wealth between the rich and the poor, where the
gap between the rich and the poor is widely spaced and noticeable. Income inequalities has
existed for a long time in human history, with evidence of inequality existing in historical point
like during the reign of feudal lords and colonialism among others. Hence we can say that income
inequality has been a persistent economic problem. So persistent that, it has become a
justification for goverment intervention in the economy. A high income inequaliy could lead to
social unrest, increased crime rates, increased spending on welfare, reduced standard of living
and is generally considered to be unfair. The free market has been generally criticised for its
inability to address equity issues, due to it’s immense focus on efficient. It is therefore very
common to see many capitalist nations with income inequality problems. In reality, there is
usually an equity and efficiency trade off such that, the more efficent an economy becomes, the
high the tendency of inequitable distribution of wealth and resources. Hence, it is not common
to see countries with a increasing per capita income, with high levels of income inequality. This
is because translation of economic growth to a more equitable distribution requires conscious
from the political system in place

Income inequality has been noted in sweden is one of the highest in OECD countries. Statistics
from the world bank shows that income inequality in Sweden has been on a rising trend. The
country’s income inequality has measured using the gini index, shows that income inequality
grew from 25.3% in 2003 to 29.2% in 2015. This paper serves to answer the questions of what is
responsible for this growing trend of income inequalities and what can be done to addrees this
problem of income inequality. We shall employ the relevant tools of microeconomics theory to
examine the challenge of income inequality and proffer solutions which can be adopted by the
government.
2.0 Theoretical Framework
Market economies have been widely accepted to produce the most efficient results. For this
reason, many economies are around are mixed economies, with a lean towards market economy.
Market economies provide strong incentives for citizens to expand their wealth, because they
are working for themselves and not the goverment. As a result, this creates a ”winner takes all
effect” where participants are only interested in increasing their share of the market, with little
consideration for others. Since the market economy cannot solve the problem of inequalities.
Government being key actors in the economy have to intervene in the redistribution of income.
When the government chooses to intervene in the problem of inc ome inequality, there exists an
efficiency-equity trade off. These means that the society may have to choose less eficient results
in order to ensure more equitable disttibutions are made

Income inequality can be seen in two ways: Relative Income inequality and absolute deprivation.
Relative income inequality looks at the total wealth of the country and measures how much the
poor citizens have in comparison to the rich. Absolute deprivation establishes a standard for
”minimum acceptable” income line and compares the income of the poor citizens against this
standard. (Gruber, 2007)

The government typically achieves this by levying taxes on the rich and employing this money
collected in various welfare programs to alleviate poverty or result into a more eqitable
distribution of the economy. Most economies have progressive taxation systems, in which the
higher you earn, the more tax you pay. Welfare programs are of vaious kind, there are the cash
welfare programs where the government dispenses money to qualified citizens of the program,
or categorical welfare programs which target a particular demography like single mothers etc.
Gini coefficient measures relative inequality ny checking the level of disperse an economy has to
a perfect even distribution of income.

Inefficient redistribution of income could result in problems like dampening the incentives of the
rich to pursue more wealth, over reliance of the poor on welfare programs among others.
3. INSTITUTIONAL FRAMEWORK
The swedish government played an extensive role in the nation’s economy during the 70’s and
80’s. However due to the decline in economic perfeormance, it became apparent that there was
a need to introduce some competition in to the government dominated econonomy. A series of
liberalisation in the 1990s economy saw the liberalisation of the swedish economy into one of
the most liberal economies of the world. The country achieved this through tax cuts and
deregulation of markets among others. However the liberalisation of the swedish economy,
made the economy more prone to the downfalls of capitalism such as income inequalities.

The nation of sweden also welcomed a large number of migrants to its borders, in the wake of
international crisis. This increased the supply of labour in the semi-skilled and unskilled labour
market, thereby drivings prices too as low as possible. This has contributed to further widening
the gap of income inequality in sweden. Another factor that has contributed to the widening
inequality gap is the increase in capital income earned by the rich from stocks, real estates and
other forms of investment. This had led to an increase in the income of the rich citizens while the
low and middle income remain the same.

Sweden currently has onr of the highest tax rates in th tax rate and income inequality

Although Sweden is still one of the top 10 OECD countries in terms income inequality as
measured by the gini co-efficient, it ranks 10th out of the top ten countries as at 2017, and may
still detoriate further, given than the countries income inequality has been on an increasing trend
since the 1980s. The gini coefficient of sweden has grown by 3.9% over the period of 2003 to
2015, from 25.3% to 29.2%.

4.0 Analysis
One of the most effective tools for reducing income inequality distribution, is to raise taxes levied
on the rich. However, care needs to be taken in implementing a change in tax rates in sweden
because the country has one of the highest taxes in the world. Further increasing taxes may
create an adverse effect on the rich populace, by lowering the incentives for wealth pursuing
activities by the rich. As a result increased taxation should only be considered if the income
inequality in sweden deterioriated further.

As an alternative, the governmrnt could also encourage opportunities that would lead to
increased levels of quality employment. Increased levels of employment have a ositive impact on
income inequalities. This is especially relevant for the immigrants who will have tougher chances
of finding employment within the swedish economy, because of their low bargaining powere.
Measures should also be taken to frequently review the wage system operating in the swedish
economy in order to ensure that minimum wage are sufficient to keep it’s citizens from going
below the poverty line and that, real incomes are rising to match increases in salaries.

Comprehensive social security system that provide adequate level of welfare and income security
should be promoted. The governmrnt could design better welfare program, which does not focus
on the cash benefits but rather focus on income supporting roles, that would reduce dependence
on welfare benefits. An active growth measurement should be incorporated in these programs
to ensure that individuals have the necessary information and resources availed to them in order
train them to assume more income beneficial roles, through employment or
entrepreneurship.Increased participation of immigrant women in the labour market should be
promoted.

Government could also intervene in housing costs and mortgages that make real estate
unaffordable to middle income earners. By designing policies to protect the interest of the middle
income earners interested in purchasing real estate, the government is giving them the
opportunity to earn capital gains on their assets, thereby reducing the income inequality gap.

5. Conclusion
Income inequality is an economic problem that has existed for many years, income inequality in
sweden has been on an increasing trend as measured from data obtained from OECD. The main
driver of this income inequality is capital income arising from the sale of capital assets like real
estate and financial assets like stock. To tackle the problem of income inequalities, goverment
are advised to create more employment opportunities and design better welfare programs that
would discourange over reliance on welfare benefits.

Appendix one
Source: World bank
https://data.worldbank.org/indicator/SI.POV.GINI?end=2015&locations=SE&name_desc=tru
e&start=2003&view=chart

References
https://www.indexmundi.com/facts/indicators/SI.POV.GINI/rankings
Wealth Inequality in Sweden: What Can We Learn from Capitalized Income Tax Data? IZA DP No.
9902 April 2016 Jacob Lundberg Daniel Waldenström http://ftp.iza.org/dp9902.pdf
https://panampost.com/diego-sanchez/2017/01/13/sweden-from-welfare-state-benchmark-
to-liberalization-role-model/?cn-reloaded=1
http://www.reforminstitutet.se/wp/wp-
content/uploads/2014/03/Twentyfiveyearsofreform140301.pdf

Sweden is regarded as a welfare state because of it’s vast social security coverage. The swedish
social security covers welfare programs of various nature, designed to alleviate poverty. There
are family benefits programs, which cover allowances such as child allowance with an extra
supplement for large families, allowances for single parents, allowances to support parents still
in school etc. There are programs designed to cater for the needs of disabled, the elderly, the
unemployed and a variety of contingencies that could impoverish its citizens (Ginsburg and
Rosenthal, 2006)

http://newpol.org/content/ups-and-downs-swedish-welfare-state-general-trends-benefits-and-
caregiving
Helen Lachs Ginsburg and Marguerite G. Rosenthal