Rising Earnings Inequality in Sweden: The Role of Composition and Prices

The rise in cross‐sectional earnings inequality in Sweden between 1990 and 2002 is decomposed into changes in market prices of observable characteristics, changes in the composition of the labor force across demographic groups and industries, and changes in unobservables. The Swedish experience is then compared with that in the United States. In both countries, the rise in earnings inequality is a consequence of rising upper‐tail dispersion. Contrary to the U.S. experience, where the rise is largely driven by changing market prices of observables and increased residual dispersion, shifts in the Swedish labor‐force composition have contributed positively to the rise in the p90–p50 gap. The rise in the Swedish p99–p90 gap, however, is entirely accounted for by changes in prices and residual dispersion.