A Micro Perspective on r>g in Norway

By exploiting large-scale administrative data on estimated gross and net personal wealth in Norway from 2010 to 2018, this paper by Roberto Iacono and Elisa Palagi establishes the first micro-level analysis of the difference between the real return on wealth and the real growth rate of total pre-tax income across the entire net wealth distribution. They show that, for the top half of the distribution, the aggregate R-G underestimates its micro counterpart r-g, whilst the opposite happens for the bottom half, indicating that the micro r-g qualifies as a more precise measure to thoroughly analyze the dynamics of income and wealth inequality.

Key results

The authors find heterogeneity in r-g across the net wealth distribution, with scale dependence explaining around 44% of the variation in r-g when moving up from the bottom to the top wealth decile of the net wealth distribution.
For the top half of the distribution, the aggregate R-G underestimates its micro counterpart r-g, whilst the opposite happens for the bottom half.

Policy recommendations

The results indicate that in Norway, the heterogeneity of the rates of return on wealth may be an important determinant of increasing inequality, with the growth rates of income playing a smaller role since the latter vary less across the distribution. We also show that the rates of return on wealth are clearly increasing with the share of financial wealth within individual wealth holdings. Hence, our main policy lesson can be summarized as such: policymakers aiming at reducing inequality should either tax wealth more progressively, or they should incentivize access to ownership of financial wealth also for the less wealthy, in order to reduce the gap in the rates of return between the wealth rich and the wealth poor.

Figure: The distribution of r-g in Norway

Contacts

Authors

Roberto Iacono (Norwegian University of Science and Technology): roberto.iacono@ntnu.no
Elisa Palagi (Institute of Economics and EMbeDS, Scuola Superiore Sant’Anna, Pisa): elisa.palagi@santannapisa.it

Media inquiries

Olivia Ronsain: olivia.ronsain@wid.world; +33 7 63 91 81 68

Acknowledgments

The authors are grateful to Y. Berman, E.E. Bø, M. J. Dávila-Fernández, C. Martinéz-Toledano, B. Milanovic, M. Morgan, S. Morelli, T. Piketty, M. Ranaldi, A. Roventini for comments and suggestions. The technology to access the data remotely, Microdata.no, was developed in a collaboration between the Norwegian Centre for Research Data (NSD) and Statistics Norway as part of the infrastructure project RAIRD, funded by the Research Council of Norway. The views expressed herein are those of the authors and do not necessarily reflect those of our institutions. All errors are our own.