Report on the Danish Distribution of income 2020 – inequality, incomes, and incentives

Report on the Distribution of income 2020 (Fordelingspolitisk Redegørelse 2020) describes and analyses the development in incomes, inequality, and incentives. The report is primarily based on CEPOS’ own calculations based on registry data from Statistics Denmark’s and the family type model of the Ministry of Economic Affairs and Interior. The methodology used in this publication are similar to methods used  in the Ministry of Finance and other ministries. The publication can be used as a reference work in the debate about inequality, distribution, and incentives.

The report describes these aspects, among others:

• Development in real disposable income for different social groups (students, pensioners, cash benefit recipients, workers, executive managers, etc.).
• Development in inequality from the beginning of the 20th century focusing in particular on the development during the Nyrup, Fogh, Thorning, and Løkke governments, respectively.
• Inequality from a life perspective. Usually, when analysing inequality, the analysis is based on a ”snapshot.” Inequality is in part caused by the fact that a person might have a low income for a temporary period of time, e.g., as a student. Later in life, students have comfortable incomes. When assessing inequality based on life income, inequality is significantly reduced.
• Incentive of unemployment benefit recipients and cash benefit recipients to take a low-income job.
• Development in the low-income group, i.e., people with a disposable income (after-tax income) less than half of the median.
• Development in the group classified by the Thorning government as relatively poor.
• Inequality in an international perspective.

The main conclusions of the report are:

1. From 1994 to 2020, almost all groups in the Danish society have experienced an increase in their disposable income. Retired couples in a rented home without a private pension plan have seen an increase of 43 per cent compared to an equivalent family in 1994. Today, the family of a top management executive has a disposable income 53 per cent greater than in 1994, while a single unemployment benefit recipient has seen an increase of 12 per cent. There are certain exceptions, including young people under the age of 30 receiving cash benefits. They have experienced a decrease in disposable income of 26 per cent, primarily due to the Thorning government’s cash benefit reform reducing cash benefits for young people under 30 years of age. Unemployment benefit recipients under the age of 25 have experienced a decrease of 56 per cent since 1994, primarily due to the Nyrup government lowering the unemployment benefits for young people under 25 years of age. When considering newly arrived foreigners receiving cash benefits/integration benefits, there was a decrease in disposable income from 1994 to 2020 for both a family as well as a single household of 23 percent and 42 percent, respectively, due to Løkke’s integration benefits.
2. The increase in income has been the greatest at the top of the income distribution since the year 2000, but all levels of income have seen an increase. All income levels  have experienced a rise in real disposable income of 24 to 41 per cent (excluding students).
3. Accordingly, there was an increase in income in all municipalities. In 94 out of the 98 municipalities, the increase in income has been 20 to 40 per cent since 2000.
4. In a longer historical perspective, inequality is low. Inequality fell drastically from 1940 to 1980. Since the mid-90s, there was a moderate rise in inequality: The share of income of the top one per cent was more than halved from approx. 14 per cent of total incomes in 1940 to 5.5 per cent in 1980. Subsequently, the share of income in the top one per cent has increased to 8.7 per cent in 2015. I.e., the share of income in the top one percent in 2015 equals around two thirds of the 1940 level.
5. Based on registry data from Statistics Denmark (Danmarks Statistik), inequality has grown from 22.4 per cent in 1987 to 28.7 percent in 2018, i.e., by 6.3 percentage points, measured by the Gini coefficient. By the mid-90s, inequality remains almost the same, but then it increases almost every year until the financial crisis. It is to be noted that inequality has increased under all prime ministers – Nyrup, Fogh, Løkke, and Thorning.
6. The redistribution through the Danish welfare state is considerable. The inequality measured by the Gini coefficient is reduced from 45.9 percent for market incomes (i.e., excluding taxes and transfers) to 28.7 percent measured by the disposable incomes (i.e. including taxes and transfers). In other words, the welfare state reduces inequality by more than one third (38 percent). Transfers equal 80 percent of the reduction in inequality, while taxes represent 20 percent of the reduction.
7. Income inequality is reduced by approx. 40 per cent when looking at life incomes instead of a single year. Usually, when analysing inequality, a ”snapshot” is used for measure. Inequality is in part caused by the fact that a person might have a low income for a temporary period of time, e.g., as a student. Later in life, students have comfortable incomes. When measuring inequality based on life income, this aspect is taken into consideration.
8. Reforms under prime ministers Fogh, Thorning, and Løkke that have increased employment and wealth have also systematically increased inequality.
9. To be included in the top ten percent income bracket, an income of approx. DKK 646,000 is required and for the top one percent approx. DKK 1,5 million.
10. Since 1994, the share of total tax payments of the one percent wealthiest Danes has increased from 6.5 per cent to 9.3 per cent in 2018. A person in the top one per cent pays on average DKK 1.6 million in direct and indirect taxes corresponding to the financing of almost three public servants.
11. 30 per cent of the top one per cent has exited the group after one year, and after three years, 50 per cent no longer belong to the top one percent.
12. Only 7.5 percent of children with parents in the top one percent end up in the top one percent. Around one third ends up in the lower half of the income distribution.
13. Inequality in Denmark is the fifth lowest in an international comparison of 36 OECD countries. There is less inequality in Denmark than in Sweden. Even with an elimination of the top marginal tax, Denmark would still be more equal than Sweden.
14. The share of citizens with an income that is less than half of the median income is the third lowest in the OECD. That further underlines how Denmark is a country with a very even distribution of income. Looking alone at the number of children living in families with relatively low incomes, Denmark has the lowest share of children in the low-income group (less than 50 per cent of the median income) among all 36 OECD countries.
15. IMF estimates that global inequality has decreased during the past three decades and will further decline until 2035.
16. In 2018, 464,00 people counted as low-income measured by disposable income (less than 50 per cent of the median income). Only one in seven of the 464,000 people are relatively poor according to the definition of the Thorning government (disregarding students and persons with wealth above DKK 100,000 – at the same time, income, etc., must be low three years in a row).
17. In 2018, the relative poverty line as defined by the Thorning government equaled DKK 120,900 a year (measured by disposable income, i.e., after-tax income) or DKK 10,100 a month.
18. According to the Thorning government’s definition of relative poverty, in 2018, 65,900 people were considered relatively poor in Denmark, the equivalent of approx. one per cent of the population. That is a twofold increase since 2000, with 26,700 being relatively impoverished.
19. However, the number of impoverished people has declined by approx. 17 per cent since 2000, when applying Thorning’s poverty limit in the year 2000, adjusted to price levels as an absolute poverty limit. When applying this poverty limit, the number of impoverished people equals 22,400 persons in 2018.
20. Statistics Denmark (Danmarks Statistik) and the Economic Council of the Labour Movement (ECLM) (AE-Rådet) have put forward, that the number of impoverished children in Denmark now constitutes 61,200. The ECLM and Statistics Denmark define a child as impoverished when the family income is low for only one year. There is, however, a significant degree of mobility in the group. Also, Statistics Denmark and the ECLM apply a relative measure of poverty. When looking at the development in the number of children under the absolute low-income limit, the number of impoverished children has been reduced significantly since the year 2000. In terms of the number of children that are under the absolute poverty limit for one year, that number has halved since 2000. If applying the Thorning ministry’s definition where low income should occur three years in a row to be counted, the number of impoverished children has been reduced by 57 percent measured by an absolute poverty line. Thus, there are fewer low-income children, not more.
21. The Social Democratic government envisions a reinstatement of the three-year poverty line. This would entail that the number of relatively impoverished will constitute approx. 65,900 persons. Thus, the number of relatively impoverished will decrease by approx. 75 per cent from the 250,500 persons measured following Statistics Denmark’s definition of only one year of low income.
22. When looking at the 65,900 relatively impoverished in 2018, the following groups are overrepresented: Cash benefit recipients, young people (especially 27-30 years of age), as well as immigrants and descendants.
23. There is great mobility out of the low-income group: Already after one year, 43 per cent has left the group, while more than half (56 per cent) will be out after two years.
24. Another way of illustrating the great mobility is to look at the income growth of specific persons, who have a low income during a given year: Those, who in 2010 were among the 20 per cent with the lowest incomes, have seen an increase in income of an entire 88 percent until 2018, while those, who were among the 20 per cent with the highest incomes, have had a decrease in their income of approx. 6 percent during the period 2008-2018.
25. Of all OECD countries, Denmark has the highest social mobility in terms of income.
26. The temporary child benefit introduced by the Social Democratic government has reduced the financial advantage for single providers in taking a job considerably. The advantage in taking a job for a single provider with two children receiving integration allowance is reduced from DKK 5,500 to DKK 3,500 a month. For a couple receiving cash benefits with two children, the advantage in taking a job is reduced from DKK 2,800 to DKK 2,100.
27. Single providers with children receive the same amount when it comes to integration allowance (after six years of residency in Denmark) as they do if they receive cash benefits.
28. A single person with 1 or 2 children receiving maximum unemployment benefits earns approximately DKK 700 a month when taking a low-paid job.