Income, distribution, and incentives in Denmark 2019

In the Report on the Distribution of income 2019 (Fordelingspolitisk Redegørelse 2019), CEPOS analyses and describes the development in incomes, distribution, and incentives. The report is primarily based on CEPOS' own data analyses, as well as calculations based on Statistics Denmark's civil registry and the family type model of the Ministry of Economic Affairs and Interior. In the publication, measurement methods are applied the way they are used in the Ministry of Finance and other ministries.

The report describess:

• The development in real disposable income for different groups (students, retirees, cash benefit recipients, trade union workers, executive manager's family, etc.).
• The development in inequality from the beginning of the 20th century focusing in particular on the development under former prime ministers Poul Nyrup Rasmussen, Anders Fogh Rasmussen, Helle Thorning-Schmidt, and Lars Løkke Rasmussen, respectively.
• Inequality from a lifetime perspective. Normally, when inequality is analysed, it Is based on a ”snapshot”. Some of the inequality is caused by the fact that people 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 on lifetime income, inequality is significantly reduced.
• The incentive of unemployment benefit recipients and cash benefit recipients to take a low-income job.
• The development of the low-income group (people with a disposable income less than half of the median).
• The development of the group classified by the Thorning-government as relatively poor.
• Inequality in an international perspective.
• The wealth of the Danes. Among other things, the composition and the distribution of the wealth of the Danes are reviewed. Oxfam's analysis of the global inequality of wealth is also clarified.

The main conclusions of the report are:

1. Almost all groups in the Danish society have seen an increase in disposable income from 1994 until 2019 (retired couples in a rented home without a private pension plan have seen an increase of 41 per cent, an executive manager's family an increase of 50 per cent, while a single unemployment benefit recipient has seen an increase of 11 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 because the Thorning-government's cash benefit reform reduced the cash benefits for young people under 30 years of age. Unemployment benefit recipients under the age of 25 have experienced a decrease of 54 per cent because Poul Nyrup Rasmussen lowered the unemployment benefits for young people under 25 years of age. If you consider newly arrived foreigners receiving cash benefits/integration benefits, there was a decrease in disposable income for both a family as well as a single person of 23 per cent and 42 per cent, respectively, from 1994 to 2019 (due to Lars Løkke's integration benefits).
2. In 2017, the average gross income (before taxes) for adult Danes equalled DKK 365,000 (2019 level). Gross income includes wage income, self-employment income, benefits, interest- and equity income, etc. To be counted in the top 10 per cent an income of approx. DKK 630,000 is required, and for the top 1 per cent approx. DKK 1.5 million.
3. Inequality is low seen in a longer historical perspective. Inequality fell considerably from 1940 to 1980. Since the mid-90s there has been a moderate rise in inequality: The share of income of the top 1 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 1 per cent has increased to 8.7 per cent in 2015. In other words, the share of income in the top 1 per cent in 2015 equals around 2/3 of the level in 1940.
4. Calculated on the basis of the civil registry of Statistics Denmark (Danmarks Statistik), inequality has grown from 22.4 per cent in 1987 to 28.9 per cent in 2017, i.e. by 6.4 percentage points, measured by the Gini coefficient. By the mid-90s, inequality basically remains unchanged, but subsequently, it increases almost every single year until the financial crisis. It is to be noted that inequality has increased under all prime ministers – Nyrup, Fogh, Løkke, and Thorning.
5. Inequality has increased since 1987. The income growth in the top of the income distribution has been the most significant, but all groups have experienced income growth. Hence, it is not the case that low-income groups have experienced a decline in income.
6. Statistics Denmark (Danmarks Statistik) recently pointed out that the lowest income groups have experienced a decline in income the past 10 years (from 2007-2017, measured by the decile limits). However, an additional 124,000 students (recipients of study grants (SU)) have been added to the student population from 2007 to 2017. These are young people, who typically can look forward to high incomes later in life. If you exclude students, (as with measurement of relative poverty) all income groups have seen positive income growth.
7. Income inequality is reduced by approx. 40 per cent, when you look at incomes spanning over a lifetime instead of a single year.
8. Reforms under Fogh, Thorning, and Løkke, which have increased employment and wealth, have also systematically increased inequality.
9. Redistribution through the Danish welfare state is substantial. Inequality measured by the Gini coefficient is reduced from 46.4 per cent for market incomes (i.e. not including taxes and benefits) to 28.9 per cent measured by disposable incomes (i.e. including taxes and benefits). That means that the welfare state reduces inequality by more than 1/3 (38 per cent). Benefits constitute 80 per cent of the reduction of inequality, while taxes equal 20 per cent of the reduction.
10. Inequality in Denmark is the seventh lowest in an international comparison of 36 OECD countries. Inequality is lower than in Sweden. Even with an elimination of the top marginal tax bracket (which would lower the top marginal tax rate og 56 percent by 15 percentage points) , Denmark would still be more equal than Sweden.
11. The share of citizens, who have an income less than the median income, is the second lowest in the OECD. That further underlines, how Denmark is a country with a very even distribution of income. Among all 36 OECD countries, Denmark has the lowest share of children living in families belonging to the low-income group (less than 50 per cent of the median income).
12. IMF estimates that global inequality has decreased during the past three decades and will further decline until 2035.
13. In 2017, 473,900 people have a low income measured by disposable income (less than 50 per cent of the median income). Only one in eight of the 473,900 people are relatively poor according to the definition of the Socialdemocrat government headed by Helle Thorning-Schmidt (2011-2015) (disregarding students and persons of wealth in excess of DKK 100,000. On top of this, income, etc., must be low three years in a row).
14. In 2017 the relative poverty line as defined by the Thorning-government equals DKK 118,300 (income minus taxes) or DKK 9,900 a month.
15. According to the Thorning-government's definition of relative poverty, in 2017, 55,000 people were considered poor in Denmark equivalent to 1.0 per cent of the population. That constitutes an increase of 108 per cent since 2000 with 26,800 being relatively poor.
16. However, the number of poor people has declined by approx. 23 per cent since 2000, if Thorning's poverty limit is applied using the year 2000 adjusted to price levels as an absolute poverty line. Using this poverty definition, the number of poor people constitutes 20,500 persons in 2017.
17. The Economic Council of the Labour Movement (ECLM) (AE-Rådet) has put forward, that the number of poor children in Denmark now constitutes 65,000, the highest number ever. ECLM defines a child as poor when the family income is low for only one year. There is, however, a significant degree of mobility out of the group. Also, ECLM uses a relative measure of poverty. Looking at the development in the number of children under an absolute low-income limit, the number has been reduced significantly since the year 2000. If you look at the number of children, who are under the absolute poverty line for one year, that number has halved since 2000. If poverty is defined as low income for at least three years in a row (in accordance with the definition of the Thorning government), the number of impoverished children is reduced by two thirds using an absolute poverty line.
18. The Social Democrats envision a reinstatement of the Thorning government's poverty line if they win the next election. That means that the number of relatively poor will constitute approx. 56,000 persons, a reduction by approx. 80 per cent from the 254,000 persons measured using Statistics Denmark's definition based on only one year of low income.
19. There is great mobility out of the low-income group: Already after one year, almost half (45 pct.) is out of the group, while 56 per cent is out after two years.
20. Another way of illustrating the great mobility is to look at the income growth of specific persons, who have low income in a given year: Those, who were among the 20 per cent with the lowest income in 2008, have had an increase in income equalling 132 per cent all through 2017, while those, who were among the 20 per cent with the highest income, basically have had no change in their income on average in the period 2008-2017.
21. Looking at the 55,800 relatively poor in 2017, the following groups are over-represented: Cash benefit recipients, young people (especially of the age between 27-29 years old), immigrants and descendants as well as single adults (in particular single men with no children at home).
22. A single person with children receiving maximum unemployment benefits increases his og her disposable income by approx. DKK 600 a month by taking a low-salary job of approx. DKK 128 an hour.
23. An adult Dane has a fortune of DKK 1.3 million on average. That includes assets of DKK 1.9 million and debt of DKK 0.6 million. The actual assets (primarily all-year dwelling) constitutes approx. DKK 1 million on average, while pension funds constitute approx. DKK 600,000 and other financial assets (e.g. shares, bonds, bank accounts) constitute approx. DKK 300,000.
24. There is a natural correlation between age and wealth. Typically, you save during the working age in order to maintain your living standards after retirement. The average wealth peaks for the 69-year olds at DKK 2.7 million. Age dependence of wealth contributes significantly to explaining the wealth inequality in Denmark.
25. Almost 10 per cent of Danish families have a negative net worth, while half owns wealth of above DKK 670,000, approx. To be considered in the top one per cent requires wealth of DKK 9.3 million and for the top 0.1 per cent DKK 27.3 million.
26. In some municipalities North of Copenhagen (Gentofte, Rudersdal, and Hørsholm) the average wealth constitutes DKK 3-4 million per adult, approximately four times as much as the municipalities with the least wealthy, such as Ishøj, Randers, and Brøndby averaging wealth of DKK 900,000-1 million per adult.
27. The 26 richest people in the world (including Jeff Bezos, Bill Gates, and Mark Zuckerberg) own wealth equivalent to 0.4 per cent of the total wealth in the world.
28. In the debate, there has been a focus on the 26 richest people in the world. Oxfam states that the 26 richest people own as much wealth as the 50 per cent owning the least wealth in the world. This does not indicate much since the 40 per cent with the least wealthy own a total fortune of DKK 0 (due to the fact that many people have no wealth or even naturally have a negative asset value – e.g. it is normal to take on debt when you are young). That means that a person who owns a one-dollar fortune is wealthier than the 40 per cent with the lowest wealth.
29. In the OECD report on wealth inequality, it would seem Denmark has a high level of wealth inequality. Measured by the share of the wealth of the top 10 per cent, OECD finds that Denmark has the third highest wealth inequality. However, this report from the OECD does not include wealth from occupational pensions, which constitute more than 200 per cent of GDP in Denmark. When including occupational pensions, Denmark has the thirteenth highest inequality out of 23 countries, i.e. a midfield position.

This publication has been prepared by chief economist Mads Lundby Hansen, chief consultant Carl-Christian Heiberg, chief consultant Jørgen Sloth Bjerre Hansen, and economist Thomas Due Bostrup.

Authors concluded this publication on April 2, 2019.