Wage Compression, Not Redistribution, Explains Nordic Equality
New NBER study by finds that the Nordic countries’ famous income equality is largely a result of wage-setting institutions—more than taxes and transfers.
A recent paper highlighted in the NBER Digest challenges conventional wisdom about the roots of income equality in the Nordic countries. Contrary to the common narrative that generous welfare states drive equality, researchers found that wage compression—the narrowing of income differences in the labor market itself—accounts for most of the Nordic model’s success in reducing inequality. The study compares pre-tax and post-tax income data across 16 high-income countries, with striking results: in Norway and Denmark, market income inequality is already as low as post-tax income inequality in the US.
This new insight underlines the powerful role of collective wage bargaining, strong unions, and centralized wage-setting institutions in shaping the Nordic economic landscape. Redistribution still matters—but it plays second fiddle to the built-in equality of the labor market.