Inequality and redistribution: Evidence from Scandinavian and Mediterranean countries

Abstract

This paper investigates the adjustment of government redistributive policies in Scandinavian and Mediterranean countries following changes in income inequality over the period 1980-2021. We use two complementary measures of inequality: the ratio of the share of total income accruing to top decile income holders divided by that accumulated by the bottom 50%, as well as the share of total income accruing to top percentile income holders. We combine two modelling procedures: first, we analyse the time-varying dynamics between income inequality and redistribution, and then use a non-linear framework to test for the existence of asymmetries in their long-run relationship. We find that the sign of the relationship between inequality and redistribution is mostly positive and time-varying. This result suggests the existence of evidence in favour of the Meltzer-Richard hypothesis. Overall, we also find that redistributive measures, in the form of taxes and government transfers, adjust more rapidly to increases in income inequality than to decreases. Finally, in most countries we obtain a significant long-run relationship between redistribution and income inequality