Predistribution, Not Redistribution, in the Nordic Countries

Maybe it’s just because I live in Minnesota, a state where the differences between immigrants from Sweden, Norway, and Finland are still apparent in the names of towns and the surnames of people. But when I run into people who would prefer that the US distribution of income be more equal, they often point to the economies of northern Europe as a real-world example of what they have in mind.

How do these countries do it? Magne Mogstad, Kjell G. Salvanes, and Gaute Torsvik explore the evidence in “Income Equality in the Nordic Countries: Myths, Facts, and Lessons” (Journal of Economic Literature 2025, 63:3, 791–839).

In thinking about why greater inequality of income prevails in the Nordic countries, it’s useful to divide possible reasons into redistribution and predistribution. An example of redistribution after income is received would be public policy decisions like higher marginal tax rates on the well-off, or greater support for those less well-off, or some combination of those two. In contrast, predistribution involves affecting what income is received in the first place, before taxes and transfer payments. Examples might include minimum wage laws, greater workers representation (though unions or other mechanisms), or rules that affect the ability of top executives to be paid in the form of bonuses and stock options. Thus, Mogstad, Salvanes, and Torsvik write:

We argue that the contemporary Nordic model is built on four principal pillars: (i) significant public investment in family policies, education, and health services; (ii) coordinated wage setting within and across industries; (iii) substantial expenditure on social insurance to safeguard against income losses due to unemployment, disability, and illness; and (iv) high and progressive taxation of labor income, complemented by subsidies for services that support employment. …

A key finding is that a more equal predistribution of earnings, rather than income redistribution, is the main reason for the lower income inequality in the Nordic countries compared to the United States and the United Kingdom. While the direct effects of taxes and transfers contribute to the relatively low income inequality in the Nordic countries, the key factor is that the distribution of pretax market income, particularly labor earnings, is much more equal in the Nordics than in the United States and the United Kingdom. Another key finding is that equality in hourly pay, not work hours, is the primary explanation for why the Nordic countries have much lower inequality in labor earnings than the United States and the United Kingdom. … Quantitatively, the compression of hourly wages matters the most, explaining a large majority of the difference in earnings inequality between the Nordic countries and the United States and the United Kingdom.

The authors go through possible alternative reasons for why the four elements of the Nordic model might lead to greater equality. For example, “Nordic governments spend heavily on children and families through heavily subsidized day care, education, and health programs. Although these programs are typically universal, they could help equalize the distribution of skills and human capital if the take-up or the positive effects of the program are concentrated among children from poor or disadvantaged families. We argue that most of the available evidence suggests that this is not the key explanation for income equality in the Nordics. A substantial body of research evaluating the causal effects of day care, education, and health policies in the Nordics suggests that these policies have a relatively modest impact on inequality in skills, educational attainment, and labor market outcomes.”

It’s important here to be clear on how the minds of economists operate. The authors are not arguing in an overall sense either for or against these universal social programs. They are only making the very specific argument that the evidence about the effects of these programs does not support the claim that they are a primary cause of the greater income inequality that exists in the Nordic countries. For the authors, the key difference is that those with higher education and skills are paid a substantially higher premium in the US and UK economies than in the Nordic economies, compared with those who have lower levels of education and skills.

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