Cross-country comparisons of inequality in market and disposable income: Policy matters

This graph is taken from a recent Luxembourg Income Study (LIS) working paper (45-page pdf):

The countries are arranged in ascending order of inequality in disposable income, and  the Nordic countries take four of the top five positions. What strikes me is the extent to which this is due to government policy: the Gini coefficient for market income in Canada is the same as Denmark's, and is quite a bit lower than in Sweden. Indeed, Sweden is closer to the US than it is to any of the other Nordic countries.

A recurrent theme in discussions of the Nordic model takes the form of "That's all very well, but those policies won't work here without [insert some feature of Nordic countries here]." Libertarian types who would otherwise approve of the free market dynamism of the Nordics assert that the Nordic model can only work in small, homogeneous countries. As a general argument, I'm not convinced - but I can see why it would be hard to export the Nordic model to the US.

At the other end of the spectrum - those who would otherwise approve of Nordic levels of spending on social programs - some (eg: this commenter) point to the role of trade unions. But it's hard to conclude from this chart that union density matters much when it comes to reducing inequality. For example, look at Germany (where unions play a crucial role in setting wages) and the US (where they are decidedly less important): both have identical levels of inequality of market income. The distribution of disposable income is lower in Germany because of its redistributive policies, not because unions are more powerful.

That's not to say that cross-country institutional/cultural idiosyncrasies aren't important; they are. But there's little reason to believe that these factors have to be  changed before the Nordic model can work.

Comments

[chris]

Great post. Thanks.

[reason]

Hey this is another great post. I'll email the link to Mark Thoma again if you don't mind. I think your blog deserves more recognition. I'd love to have you debate say Dean Baker on what pragmatic progressive policies should look like.

[Tom Geraghty]

Unions seem to play an important role in reducing reducing wage inequality, which is much lower in the Nordic countries than in the US. Does that imply that non-wage income inequalities are huge in Sweden or Germany?

I would also argue that unions are important for developing any kind of political momentum for left economic policies.

[Stephen Gordon]

I don't see how that link contradicts the LIS study. Nor does it say anything about unions: the focus is on education.