Economic inequality in general and income inequality in particular have been showing increasing trends in the last two decades. Cornia and Kiiski (2001) showed that causes of the recent rise are strongly linked to neoliberal policy reforms, often referred to as the Washington consensus, that have been increasingly adopted in industrialized countries. Trade liberalization, technology issues and redistributive inefficiency are put forward as the major new driving factors. Rising income inequality is characterized by an increase in the capital’s share of total income and increased earnings inequality. Moreover, Jäntti and Sanström (2005) argue that there is a disproportionate increase in the income share of the richest. The same findings are reported in OECD economic studies by Föster and Person (2002) and Förster and d’Ercole (2005). They show that there is a continuous increase in the market income inequality despite different approaches to redistribution, which highlights the efficiency/equity trade-off problem. However, empirical investigations of the relationship between inequality and economic growth have given disparate results and, so far, no consensus has emerged.
The primary objective of this thesis is to analyse recent changes in income inequality in Norway. Is income inequality rising? Where in the distribution changes occur? Are the rich getting richer? Which income components contribute to these changes? Has there been any change in the importance of different income sources? The analysis is based on individual, rather than household equivalent incomes. This choice of income unite is crucial for measuring the extent of income differences and, thereby, overall inequality. In addition, applying selected inequality measures (decile distribution, Gini coefficient and squared coefficient of variation) is supposed to shed more light on different parts of the income distribution. The evidence is clear. Since 1996, inequality of income in Norway has been rising. The increase can be attributed to increased share of income accruing to the rich. For instance, the share of top 5% individuals in total after-tax income has increased from 16% to 19,5% in 2004 and it is still rising. Inequality of after-tax income has, in general, been showing the same pattern as the inequality of “market income”. However, redistributive effects of targeted transfers and taxes were diminishing in the observed period. In 1996, inequality of market income, measured by the Gini coefficient, was reduced by 0,067 (from 0,405 to 0,338), while in 2004, this reduction was 0,056 (from 0,408 to 0,352). Decreasing inequality of total income without capital and inequality measured by the squared coefficient of variation (SCV), put emphasis on the capital income. Capital’s share of the total income increased moderately, from 6,24% to 8,53%, but capital incomes have been highly concentrated at the top of the distribution (share of total capital income accruing to the top 1% has increased from 55,77% to 73,59%). This is evident from the relative contribution of capital incomes to overall inequality. Even though the Gini coefficient and the SCV show different levels of capital’s contribution, 21,2% and 89,31% respectively, they both show an increasing trend. Market income inequality and inefficient taxation of capital incomes (dual taxes) are confirmed to be the main causes of these recent changes.