The New Economics of Income Distribution, by Friedrich L. Sell

Published by Edward Elgar, ISBN 1 78347 236 9, hbk, xiii + 264 pp, 2015, £80

Not only is inequality of both wealth and income increasing in many countries, including the UK, but interest in inequality and in its causes is also increasing. The question ‘Why is income distributed in the way that it is?’ demands an answer. To respond that the situation is complicated would be an understatement. In order to bring some order to the complexity, Sell looks for equilibria in a variety of contexts: in markets; in bargaining (for instance, between employers and unions); and in political economy – where political actors will fit economic policies to their preferred electorate sectors, and where social consensus can change quite dramatically. To take one example: wealthy countries have over the last century shifted from an equilibrium in which less than a tenth of national income was consumed by taxation to a new equilibrium in which between a third and a half of national income is consumed by taxation (p.8). Sell’s conviction – and it is that – is that as old equilibria dissolve, new ones emerge.

Sell sets off from Thomas Piketty’s Capital in the Twenty-first Century. The real rate of return on capital is higher than the overall real growth rate of the economy, so inherited wealth grows, and income growth is lower than the rate of return on capital – but in an ageing population in which there are fewer workers real wages should increase: but then those fewer workers will suffer from the lower pensions generated by pay-as-you-go state pensions and will need to provide pensions for themselves, so their savings rate will increase, thus depleting their incomes and increasing capital accumulation: but now capital is flowing from north to south, thus depleting capital in the north. The further we read in this book, the more complicated and the less predictable the situation appears to be.

Sell shows how the markets in labour and capital relate to income distribution (and he particularly studies the effects of minimum wage policies); he looks for models to describe the ways in which income distribution changes during business cycles; he studies social and industrial trends and patterns; he asks how globalization affects income distribution, and particularly how migration flows move human capital between countries; and he discusses the influence of such social forces as inequity aversion. He finds that even though public preference is for less inequality, government policies on redistribution have contributed to increasing inequality. One of the main conclusions of the book is that ‘governments have increasingly lost since the beginning of the new millennium their capacity to correct the skewness of personal income distribution according to the preferences of the society’ (p.220). Unfortunately, Sell regards the discussion of taxation and social insurance as ‘public finance’ and not as ‘distributional economics’, and so allocates the subject to his ‘final remarks’ rather than giving it a chapter of its own. This is a pity. It is also a pity that he does not critique the contradiction inherent in the suggestion that countries should ‘improve the targeting and reduce the adverse labour market effects of social spending’ (p.222). If there is a second edition of this book then it would be useful to have Sell a chapter on how different kinds of social security benefits – social insurance, means-tested, and unconditional – affect income distribution. Even better, a book on the subject would be particularly useful. The current book sets out from Thomas Piketty’s significant book Capital. The next book could set out from Tony Atkinson’s equally important Inequality.

This book ought to have a health warning attached to it. It assumes at least a first degree level of understanding of economic concepts and mathematics, and in places a master’s degree level, and anyone without such prior understanding will struggle to understand much of the book: but for anyone with such an understanding the book is an absorbing read. It ought to be prescribed as a required text for anyone embarking on a research degree in macroeconomics or welfare economics.

There are some errors in the text ( – on page 3 Piketty’s book is called Capitalism rather than Capital), the index is seriously deficient (numerous important concepts, such as ‘bargaining’ and ‘equilibrium’, do not receive entries), and there are no lists of tables and figures, which we would expect in a book such as this. Sometimes the discussion might have been developed further. Some of the inadequacies of the Gini coefficient (again, no index entry) are quite rightly explained, but the coefficient is then employed, even though very different cumulative income curves can generate the same Gini coefficient. The Palma (the ratio of the income of the highest earning 10% to the income of the lowest earning 40%) could have been employed instead. But these are minor criticisms. This thoroughly researched volume will contribute massively to our understanding of income distribution and of the highly complex roots of inequality, will generate more research on the many linkages that the author has found between different factors, and will generally be the point from which future research in the field sets out.