Development of Income Distribution in Iceland 1992-2010

In this paper we give an account of extensive research into the Icelandic income distribution that we have undertaken in recent years. We place our research into context with previous research. The main novelty of this paper is new data and new decompositional analysis of the drivers of inequality developments, before and after the financial collapse. Our research shows that income inequality increased greatly from 1995 to 2007, following a period of increased equality from 1988 to 1993. The extent of the increase after 1995 was exceptional by international standards. The increased inequality is most marked when all disposable earnings (after tax) are taken account of, but it is also extensive even though financial earnings are partly or fully excluded. Employment earnings also became more unequally distributed. Tax policy increased the extent of inequality in the same period. After the financial collapse of 2008 the income distribution became significantly more equal up to 2010. New comparison of income inequality developments in the Nordic countries shows that inequality increased in all of them from 1995 to 2008, varying though between countries and years. The Nordic nations had the most equal income distributions before the period of change and still remain amongst the most equal. Iceland however galloped way ahead in the inequality development from 2001 up to 2007. The hypotheses of no significant changes in the Icelandic income distribution between 1995 and 2007 are rejected. No valid data supports such claims