A New Picture of Swedish Earnings Inequality: Persistent and Transitory Components, 1960-1990

Abstract

Using a large individual longitudinal database, I decompose the cross-sectional variance of male annual earnings in Sweden between 1960 and 1990 into persistent and transitory components. The persistent variance displays a downward trend during the whole sample period, but with the rate of decline more rapid up until the early 1980s than afterwards. The transitory variance has increased from 1960 until the early 1970s, decreased slightly until the late 1970s, and then risen again during the second half of the 1980s. An important lesson from these results concern the interpretation of the rise in cross-sectional inequality observed after the 1983 breakdown of centralized bargaining in Sweden. While it has often been presumed that this growth reflected increased returns to skills, this study shows that it was in fact due to increased transitory earnings fluctuations.