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Wealth inequality and the Great Recession:

Evidence from Sweden

Jacob Lundberg and Daniel WaldenströmUppsala University

Presentation at MiSOC/ISER, September 16, 2014

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The economy in Sweden 1999-2012

U and Y Disposable income Gini

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This paper

Two main objectives:

• First, estimate of wealth distribution in Sweden since 2008. – Wealth tax repealed in 2007, Property tax reformed in 2008

– No household wealth data exist after 2007 in Sweden!

• Second, study role of Great Recession for wealth distribution– Shocks to output, growth, unemployment and stock prices

– Were the rich able to escape the crisis or did they take the strongest blow?

– Did crisis experiences differ among the rich, across occupations etc?

Paper structure• Estimating private assets and liabilities• Estimate wealth distribution 1999-2012

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Recent research on other countries

• United States– Wolff (SCF, 2012): "Asset price meltdown for the middle class"

• Plummeting house prices main explanation

– Saez and Zucman (2014): "Wealth inequality is making a comeback"• New estimates using capitalized capital income

• Germany:– Grabka and Westermeier (GSOEP, 2014): Small changes in both wealth

levels and household wealth inequality

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Data

• Database: LINDA– 3,35% nationally representative sample (300,000 individuals)

– Panel

– Household members added (in total about 800,000 obs)

• Wealth data sources– Wealth Register 1999-2007

– Other registers 2008- (Income and Tax Register, Property Tax Register, Land survey register)

• Additional information– Firm-specific dividends (SIX financial market information)

– Financial Accounts (macro aggregate on household financial balances)

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Results Part I: New estimates of individual wealth 2008 2012‒

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Estimating individuals' wealth in 2008-2012

• We use different approaches– Observed actual stocks (non-financial assets, debts)

– Observed dividend income and payout/share

– Regression-based "Investment income method"

– Chain with price changes assuming no transactions

• Calibrate model using "true" outcomes during 1999-2007

• Problem: too little noise in imputed variables and is added noise independent of the variables– Rubin (1976), Pagan (1984), Dardanoni et al (2011)

– We abstract from this issue so far

• Compute inequality estimates on individuals (so far)

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Estimation of real estate/property

• Main items: Dwellings, apartments, vacation homes, farms, land

• Tax-assessed values from Property register (Fastighetstaxeringsregistret)– Includes information about individual ownership shares– Merge with individual's in income tax register

• Sales prices ratios (Market price/Tax value) based on actual transactions computed by Stat. Sweden by year, municipality

• Computation:

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Average housing value: estimated vs actual

1998 2000 2002 2004 2006 2008 2010 2012 20140

200000

400000

600000

800000

1000000

1200000

Average housing value in Wealth Register Our estimated average houseing value

SEK

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Real estate estimations vs actual

Mean Gini

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Financial asset estimations, 2008-

• Bank deposits, Listed shares, Mutual funds, Apartments

• Bank deposis– Regression-based approach

– Regress average interest earnings for individual in year on background characteristics, time fixed effects

⇒– Problems:

• Zero-interest accounts (checking, salary)• Interest rates often increasing in deposit size, same amount over several

accounts generates different avarge interests• Within-year timing effects (withdraw balance by end of year, with annual

interest)

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Bank deposit estimations vs actual

Mean Gini

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Estimation of listed shares

For each individual we (will) get the following information:• = Firm-specific dividend income (reported on tax returns)

• = Firm-specific dividend per share (purchased by SIX)

• = Firm-specific market price per share (purchased by SIX)

• Then compute MV of individual's shares in two steps.

• Step 1:

• Step 2:

• Problems:– No dividends. Assume same portfolio as in 2007 and use firm stock price– Company events, especially new issues

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Value of shares in 2007: Estimation / "Truth"

Capitalization method(Dividend / rate of return)

Our direct estimation

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Estimation of other financial assets

• Mutual funds– Problematic since dividends typically reinvested– We use value of 2007 and calculate forward using value indices– Assumes no net savings

• Bonds and fixed-interest securities– Not fully covered. Premium lottery bonds not observed.– Use interest earnings to estimate value

• Condominiums– Simple approach: Extrapolate individual's 2007 ownership using

municipality price indices. Assuming no transactions!• Solvable using new Apartment Register at Statistics Sweden (Census 2011)

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Estimation of liabilities

• Two types of loans: State student loans (15%), Mortgages (85%)– We observe student loans

• Mortgages are observed in Inteckningar/Pantbrev– Land Survey Register (Lantmäteriet)

– By year, property and individual (incl. debt share)

• Differs from capitalization method (Debt = interest payments/interest rate)

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Liabilities projection vs actual

Mean Gini

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LIabilities in 2007: Estimation / "Truth"

Capitalization method(Interest payment / rate of return)

Our direct estimation frommortgage contracts

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Results Part II: How did the wealth of Swedes fare during the

Great Recession?

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Results 1: How well do our estimations perform?

• Average total wealth: Actual vs Estimated

2000 2002 2004 2006 2008 2010 20120

100000

200000

300000

400000

500000

600000

700000

800000

Estimated net wealthNet wealth

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Results 1: How well do our estimations perform?

• Histogram of the ratio of predicted to true net wealth in 2007, using only data for the years up to 2004 for the prediction

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Results 2: Wealth levels across the distribution

• Average wealth across deciles. No strong crisis impact!

2000 2002 2004 2006 2008 2010 2012 2014

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

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Results 2: Wealth inequality

• Gini coefficient of net wealth according to Wealth Register (–2007) and our imputations (2007–)– A level break in 2007, but no strong trend in 2008-2012

1998 2000 2002 2004 2006 2008 2010 2012 20140.65

0.66

0.67

0.68

0.69

0.7

0.71

0.72

0.73

0.74

0.75

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Results 2: Wealth inequality

• Figure: Top wealth shares (Top 10%, Top 1%, Top 0.1%) according to the Wealth Register (–2007) and our imputations (2007–)– No strong trend after crisis (similar to Gini)

1998 2000 2002 2004 2006 2008 2010 2012 20140

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Top 0.1%

Top 1%

Top 10%

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2002 2004 2006 2008 2010 20120

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

Results 3: Did net wealth trends of financial sector employees differ?

• Figure: Average wealth of financial sector employees vs all others– A drop in 2008, but after that continued increase in difference

Financial sector employees

All others

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Results 3: Wealth trajectories across age and sex

Age Sex

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To be done...

• Remake analysis using household

• Improve measurement further– Non-listed equity

• Half of all privately owned business equity (Waldenström, 2014)• Match estimated firm values from Firm register FRIDA

– Consumer durables• Car Register (estimate car values)

• Finer checks on the impact of the crisis– Impacts across asset classes– Decomposition of Gini across assets and time– Look at distribution of capital incomes

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Concluding remarks

• We investigate how the wealth of Swedish households developed before, during and after the Great Recession

• The 2007 wealth tax repeal implies a lack of official wealth statitics– We estimate household wealth using income and property tax registers

• Preliminary findings: Seemingly small effects of the crisis overall

• Wealth inequality (Gini, top wealth shares) exhibit no breaks in levels or trends

• Financial sector employees seem to experience a short-run hit, but long-run trend unbroken