Abstract
Despite similar exposure to the disruptive forces of increased trade and technological change, most European nations have not experienced the same increase in income inequality as found in the U.S. This suggests that there are other institutions or factors at play that ameliorate the effect these factors have had on the distribution of wages. This paper argues that differences in the investment patterns in education and training across countries have helped reduce the disruptive effects for certain groups of workers. In particular, the Swedish welfare state appears to have produced a work force with both higher average skill levels and lower variance than the U.S. Extensive government training programs and a highly unionized work force in Sweden seem to have reduced some of the potential market failures that can occur especially for post-school training investments. The paper reviews possible policy solutions for rising income inequality in the U.S. that would include increasing the amount of investment in human capital. It also examines lessons from the U.S. experience for current Swedish labor market policies.