The cost of inequality

Inequality has grown across the OECD in the past 30 years and The Nordics have hardly been immune. We look at the cost of the income and wealth gap.

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Mind the gap
Inequality has risen globally since 1980. The poorest in the developing economies are better off today, and the top 10% of income earners have pulled sharply ahead. That trend is even more exacerbated among the top 1% and indeed the top 0.1%.

The squeezed midrift
It is the bunch in the middle, including the lower earners in the advanced economies, who have stagnated and perceive themselves as the big relative losers. Illustrating the global trend, the US stands out, with the top 1% doubling their share of both income and wealth to 20% and 38%, respectively, between 1980 and 2010. Among the multiple drivers for greater inequality are a rising skill premium boosted by technology, falling unionisation of labour, globalisation, and lower redistribution and taxation.

The Nordics – ultra-equal to normal
The Nordic countries have seen inequality rise the most sharply across the OECD, although they started from an exceptionally level playing field and have moved to just above average equality. Much of this has stemmed from deliberate reforms to taxation and redistribution, paired with the inevitable convergence with Europe through EU membership (or EEA membership for Norway).

The inequality pain game
Opinions vary on how inequality affects economies. We have used the approach taken in a 2014 OECD study and added some Nordea forward projections, from which we conclude that Nordic long-term GDP growth could be ~20% lower and GDP per working age capita (a measure of welfare) ~25% lower if inequality keeps rising. The World Inequality Database projects that the top 1% will own 40% of total wealth by 2040.

The populist counter-attack
Such wealth concentration could raise concerns of an elite having political influence to seek to preserve its privileges, and hence harm political stability. We note with interest that a surge in political populism has occurred hand-in-hand with rising inequality over the past ten years. Executive pay in companies mirrors the rising inequality in the economy, with blue chip CEOs now paid 40x an average employee’s salary in the Nordics, and 300x in the US. We would encourage corporates to be mindful of remuneration and not let it become an ESG issue, either in how staff are treated or in terms of the governance aspects of leadership pay.

The toolbox: What can be done about inequality?
Modern societies have policy tools for redistribution, funded by taxes. Subsidised education is a real game changer, increasing social mobility and employability, but it also entails the risk of a reduced skill premium – more people will have highly qualified jobs but will get paid less for doing them. Monetary policy has become an unintended reverse tool, with ultra-low interest rates disproportionately boosting the wealth of the already wealthy.

The experts’ view
We interview Jesper Roine, Associate Professor at the Stockholm School of Economics, and author of a book that summarises the findings of Thomas Piketty’s ‘Capital In The Twenty-First Century’, looking at them from a Swedish perspective, and Nordea’s Head of Macro Research, Kristin Magnusson Bernard.

Listen to Johan Trocme & Hemming Svensson when they discuss in full the costs of inequality and why it matters to your business.

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