Beyond the Indicators: The Rise of Economic Inequality in Sweden

Abstract

Consistently ranking near the top of a wide variety of global equality rankings and indicators, Sweden holds a longstanding reputation as one of the most equal countries in the world. The reality, however, proves less favourable, with economic inequality in the country increasing more than in any other Western industrialised democracy over the last four decades. This article explores the effect of Sweden’s social democratic institutions in historically limiting economic inequality within the country and argues that the shifting dynamics of organised interests and financialisation are increasingly threatening the effectiveness of these institutions. 

Introduction

This article will evaluate the factors which have contributed to shaping the dynamics of economic inequality in Sweden, a country often considered in the literature as one of the most equal countries in the world. Despite this favourable reputation, Sweden has been seen to take the ‘sharpest inegalitarian turn’ of all advanced industrialised democracies in Western Europe since the 1980s (Therborn, 2019). The country’s progressive economic institutions have been increasingly under threat due to changing socioeconomic dynamics, including the growing role of financial interests in the Swedish national economy and the falling membership of the country’s historically influential labour unions. These changes have consequently been argued to diminish the efficacy of Sweden’s institutions in countering global trends of rising economic inequality (Svallfors, 2016).

The article will discuss how Sweden’s economic institutions have historically limited economic inequality in the country and argue that the combined effect of increasing financialisation and changing organised interests have weakened the effectiveness of these institutions. This shift will be shown to contribute to the growing economic inequality in Sweden – a troubling trend which may threaten the country’s favourable social performance and international reputation in the long-term. 

The Historical Role of Sweden’s Welfare State Institutions 

Amongst Western industrialised democracies, Sweden continues to perform remarkably well on a variety of economic inequality indicators. It has one of the lowest Gini coefficients – an important measure of wealth inequality. It also scores third-lowest in terms of the poverty gap (OECD, 2023) and takes fifth place on the global wealth inequality ranking (World Inequality Base, 2022). This high performance does not reflect the extent to which economic inequality has increased in Sweden in recent decades – a phenomenon which can be largely attributed to the historical role of the country’s economic institutions. This section will discuss the effectiveness of the social democratic institution model in terms of ‘decommodification’ and ‘stratification’, which historically limited the level of economic inequality in Sweden (Esping-Andersen, 1989; Brandolini, 2010). 

The first important factor determining the effectiveness of institutions in reducing economic inequality is decommodification, referring to the extent to which institutions provide a means of welfare that is separate from the market (Esping-Andersen, 1989). Decommodification is relevant because it allows all individuals to enjoy the benefits of the welfare state, regardless of their income, class or employment status. As such, de-commodified welfare states provide a higher level of social protection and have been found to lower health and poverty risks amongst their citizens (Jacques & Noel, 2022). Social democratic institutions provide the greatest level of de-commodification. They stand-out in contrast to the social insurance model (typical for states in continental Europe), where benefits depend to a large extent on citizen employment contributions, and to the poor relief model (characteristic of the Anglo-Saxon states), which encourages citizens to source their welfare from the private sector (Esping-Andersen, 1989). As such, Swedish citizens have historically enjoyed some of the highest level of social protections across advanced industrialised democracies, which worked to reduce economic inequalities in the country (Hallerod, 2009).

Another important factor for reducing economic inequalities by institutional means is stratification, which refers to the extent to which social or class divisions are promoted by the type of welfare system in place within a country. The social democratic welfare model proves highly effective with regards to stratification, as it promotes a universalistic kind of welfare through which all citizens are provided with the same rights. This in turn creates a social context in which cross-class solidarity is promoted, contrasting greatly with poor relief welfare models in particular, in which welfare recipients are largely stigmatised and cross-class stratification remains high (Esping-Andersen, 1989). As a result of the low levels of stratification achieved by Sweden’s economic institutions, support for pro-welfare policies has historically been higher compared to most other Western countries. Additionally, the interests of groups from all echelons of society were considered in the development of the country’s economic institutions (Wallerstein, 1999).

To conclude this section, the two aspects of Sweden’s social democratic institutions discussed within this section – decommodification and low stratification – have historically worked to limit economic inequality in the country. This can, to a large extent, account for Sweden’s continuously stronger performance on economic inequality indicators compared to other advanced industrialised democracies.

The Effect of Financialisation and Changing Organised Interests

Sweden’s economic institutions have, however, in recent decades been put under significant pressure by the processes of financialisation and changing organised interests, as will be discussed in this section. These factors have together exacerbated economic inequalities in the country and challenged the effectiveness of its social-democratic institutions. In consequence, economic inequality has increased more in Sweden than in any other OECD country since the mid-1980s (OECD, 2015), and the redistributive impact of its government policies has fallen to one of the lowest levels seen in Western European countries today (Therborn, 2019).

The process of financialisation is characterised by the rising dominance of the finance sector in the economy and the increasing involvement of non-finance firms in financial markets (Lin & Tomaskovic-Devey, 2013). In the long-run, increased reliance on financial income in the economy leads to greater disparity in earnings among workers, as financial gains are largely concentrated at the top of the income distribution. While top incomes increase as a result of financialisation, the labour share of income tends to decrease and as such, the process exacerbates economic inequality while strengthening the relative power of elite interest groups (Kus, 2013; Lin & Tomaskovic-Devey, 2013). 

In recent decades, Sweden’s economy has experienced one of the most rapid processes of financialisation and surges in capital income amongst advanced industrialised democracies. The country has seen one of the greatest increases in global capital inflows – in particular of private equity and venture capital – and its level of stock market capitalisation rose from less than 3% of its GDP in the 1970s to the second highest level in Western Europe, standing at 145% of its GDP in 2019 (Schnyder, 2012; Therborn, 2019). Strikingly, in the period from 2005 to 2014, financial corporations in Sweden generated greater profits than all of the non-financial corporations in the country combined (Belfrage & Kallifatides, 2018). This process of financialisation has brought significant structural changes to the Swedish economic model, bringing it closer to that of Anglo-Saxon states and increasingly enabling the concentration of wealth at the top of the income distribution. Capital income now makes up a total of 15% of the total household disposable income in Sweden, of which 54% goes to the top 1% of earners and only 2% going to the bottom 50% of earners (Belfrage & Kallifatides, 2018; Therborn, 2019).

The process of financialisation has both affected and been enabled by the changing dynamics of organised interests in the country. Changes in the balance of organised interests are important because they can significantly influence policy-making and in the long-term, transform economic institutions (Hacker & Pierson, 2010). In a nation where labour unions hold significant influence, policies are more likely to focus on protecting workers and prioritising them within the country’s economic system. Conversely, if power dynamics shift in favour of executives at the top of the income distribution, policymaking tends to favour their interests and workers are more likely to be neglected within the economic system (Machin, 1997). 

This is largely the shift that has been observed in Sweden in the last few decades, with blue-collar labour unions seeing a major decline in their membership and power to influence policy (Svallfors, 2016). The same trends have not been experienced by white-collar labour unions, who have largely grown in membership and influence in the same time period and continue to act as key players in economic policy-making in Sweden (Kjellberg, 2011). Moreover, policymaking power is increasingly concentrated within new expert bodies, such as the fiscal policy council, and policy-professionals, such as lobbyists and political advisors. As such, the most powerful organised interests in Sweden now represent the well-educated, high-income class, less concerned with matters of redistribution or worker protections (Svallfors, 2016). 

These changes within the Swedish economic system have been linked to substantial changes in the country’s economic policy. In 1991, income inequality in Sweden was reduced by 50% via taxes and transfers – by 2017, it was reduced by only 37% (Therborn, 2019). The amount of redistribution via Swedish government policy is now amongst the lowest in Western Europe, with only the UK and Spain redistributing less (Therborn, 2019). Sweden has also experienced the greatest drop in unemployment insurance generosity in this time period, which, along with additional cuts in health insurance benefits worked to exacerbate economic inequalities in the country (Pontusson & Weisstaner, 2017).

The effectiveness of Sweden’s economic institutions is therefore increasingly challenged by the mutually-reinforcing processes of financialisation and changing organised interests. Financialisation increases the relative power of those at the top of the income distribution, who in turn can more effectively influence additional policies working to the benefit of those within their income bracket. As has been described in the literature, the ‘new Swedish model’ now increasingly facilitates the concentration of wealth at the upper echelons of the income distribution while concurrently diminishing the relative influence of working-class interest groups (Belfrage & Kallifatides, 2018).  As such, while Sweden may still be reaping the benefits of the historically positive performance of its economic institutions, these may be unable to withstand the significant structural and political pressures which have increased Sweden’s economic inequality in the last four decades (Therborn, 2019). 

Conclusion 

In conclusion, Sweden remains more equal economically than other advanced industrialised democracies largely due to the historical effectiveness of its economic institutions, characterised by high de-commodification and low stratification. At the same time, increasing financialisation and changing organised interests have led to a greater increase in Swedish economic inequality since the mid-1980s than experienced by any other Western European country in this time period. If this trend continues, it is unlikely that the country will be able to retain its high positions on global equality rankings over the next number of decades. Policy changes will likely prove necessary to ensure that the country can keep up with its changing socioeconomic trends and limit the severity of its economic inequalities in the long-term. 

References

Belfrage, C., & Kallifatides, M. (2018). Financialisation and the new Swedish model. Cambridge Journal of Economics, 42(4), 875–900. https://doi.org/10.1093/cje/bex089 

Brandolini, A. (2010). Political economy and the mechanics of politics. Politics & Society, 38(2), 212–226. https://doi.org/10.1177/0032329210365045 

Esping-Andersen, G. (1989). The three political economies of the Welfare State. International Journal of Sociology, 20(3), 92–123. https://doi.org/10.1080/15579336.1990.11770001 

Hacker, J. S., & Pierson, P. (2010). Winner-take-all politics: How Washington made the rich richer–and turned its back on the middle class. Simon and Schuster.

Hallerod, B. (2009). Sweden – Minimum income Schemes. Peer Review in Social Protection and Social Inclusion. Available at https://ec.europa.eu/social/BlobServlet?docId=9044&langId=en

Jacques, O., & Noël, A. (2022). Welfare state decommodification and Population Health. PLOS ONE, 17(8). https://doi.org/10.1371/journal.pone.0272698 

Kjellberg, A. (2011). The decline in Swedish Union density since 2007. Nordic Journal of Working Life Studies, 1(1), 67. https://doi.org/10.19154/njwls.v1i1.2336 

Kus, B. (2012). Financialisation and income inequality in OECD nations: 1995-2007. The Economic and Social Review, 43(4, Winter), 477-495.

Lin, K.-H., & Tomaskovic-Devey, D. (2013). Financialization and U.S. income inequality, 1970–2008. American Journal of Sociology, 118(5), 1284–1329. https://doi.org/10.1086/669499 

Machin, S. (1997). The decline of labour market institutions and the rise in wage inequality in Britain. European Economic Review, 41(3–5), 647–657. https://doi.org/10.1016/s0014-2921(97)00027-5 

OECD. (2015). Sweden achieving greater equality of opportunities and outcomes. The OECD. Available at https://www.oecd.org/sweden/sweden-achieving-greater-equality-of-opportunities-and-outcomes.pdf 

OECD. (2023). Inequality – income inequality – OECD data. The OECD. https://data.oecd.org/inequality/income-inequality.htm 

Pontusson, J., & Weisstanner, D. (2017). Macroeconomic conditions, inequality shocks and the politics of redistribution, 1990–2013. Journal of European Public Policy, 25(1), 31–58. https://doi.org/10.1080/13501763.2017.1310280 

Schnyder, G. (2012). Like a Phoenix from the Ashes? Reassessing the transformation of the Swedish political economy since the 1970s. Journal of European Public Policy, 19(8), 1126–1145. https://doi.org/10.1080/13501763.2012.709007 

Svallfors, S. (2016). Politics as organised combat – new players and new rules of the game in Sweden. New Political Economy, 21(6), 505–519. https://doi.org/10.1080/13563467.2016.1156662 

Therborn, G. (2019). Sweden’s turn to economic inequality, 1982–2019. Structural Change and Economic Dynamics, 52, 159–166. https://doi.org/10.1016/j.strueco.2019.10.005 

Wallerstein, M. (1999). Wage-setting institutions and pay inequality in Advanced Industrial Societies. American Journal of Political Science, 43(3), 649. https://doi.org/10.2307/2991830 

World Inequality Base. (2022). The World Inequality Report 2022. https://wir2022.wid.world/