Questions for Article 3 Seminar 3 (Week 4)
“Why Is Income Inequality in America So Pronounced? Consider Education”, by TYLER COWEN – May 17, 2007.

1. The article states, "starting about 1950, the relative returns for schooling rose, and they skyrocketed after 1980. The reason is supply and demand….Those in need of skilled labor are bidding for a relatively stagnant supply [of educated workers] and so must pay more." U.S. trade as a fraction of the economy has also grown somewhat since about 1950. Compare the statement from the article with the prediction about the distribution of income from Heckscher-Ohlin model.

The Heckscher-Ohlin model predicts that an economy will be relatively efficient in producing goods that intensively use factors of production, which are relatively abundant, and that owners of abundant factors of production will gain from trade and owners of scarce factors of production will lose from trade. From the article, it is not clear if the U.S. is abundant in educated workers relative to some other factor of production, like land, capital or unskilled workers, but it is arguable that the U.S. is relatively abundant in educated workers relative to unskilled workers compared to many countries that it trades with. In contrast, the statement from the article does not consider trade per se, but simply the supply and demand of educated workers, which can change due to trade or for other reasons.

2. What is wrong with claiming that changes in the distribution of income are associated with trade instead of the technological changes that the article discusses?

According to the Heckscher-Ohlin model, a change in the distribution of income occurs through changes in output prices, but there is no evidence of a change in the prices of skill-intensive goods relative to prices of unskilled-intensive goods. Secondly, wages of unskilled workers should increase in unskilled labor abundant countries relative to wages of skilled labor, but in some cases the reverse has occurred: wages of skilled labor have increased more rapidly than wages of unskilled labor in Mexico, a country that is supposedly abundant in unskilled workers. Thirdly, as the article hints with its discussion of outsourcing, trade is still a fairly small fraction of the U.S. economy, so its effects on U.S. wages and income should be fairly small.

3. If technological changes are driving the income inequality within the U.S., what predictions can we make about income inequality within other countries that the U.S. trades with?

Multiple arguments can be made. Here is one: Instead of looking only at abundant factors of production in other countries and claiming that the owners of these factors of production will gain from trade and others will lose, we should also consider the ability of people in other countries to take advantage of technological gains as well. Technological changes that drive income inequality in the U.S. can also drive income inequality in other countries, although this need not be the case. The Heckscher-Ohlin predictions can hold in other countries, even if they do not hold in the U.S.