Economics 1535: Lecture 13 - iSites

Economics 1535: Lecture 13 

The Heckscher-Ohlin Model (III): Is Trade 

Responsible for Increased Wage Inequality? 

Pol Antràs (Harvard) – Spring 2013 Economics 1535: Lecture 13 1

Plan for Today 

 

 

Apply some of the insights of the Heckscher-Ohlin 

model to a particular hotly debated issue 

Try to tease out the causes of the recent increase in 

wage inequality in the U.S. and other countries 


Some Facts 

 

 

The wage of college-educated U.S. workers relative 

to that of non-college-educated U.S. workers rose 

dramatically in the period 1979-1995 (see Katz and 

Autor, 1999) 

In fact, the real wage of non-college-educated U.S. 

workers actually declined over this period 


Increase in the U.S. Wage Inequality 


Decline Among Least Skilled Workers 


Increase in the College Premium 


Increase in Relative Supply of Skills 

 

 

During the same 

period, there was a 

marked increase in 

the relative supply 

of skilled workers 

Hence, the increase 

in the wag 

premium was 

driven by demand 

factors 


What About Other Countries? 

 

Similar patterns 

(though somewhat 

less dramatic) 

have been 

recorded in other 

developed 

economies (see 

Berman, Bound 

and Machin, 1998) 


What Explains These Facts? 

Three main explanations have been put forth for the 

increase in the relative demand of skilled workers 

1. Skill-biased techological change (e.g., 

computerization) 

2. Trade integration with unskilled-labor abundant 

countries (Stolper-Samuelson at work!) 

3. Migration of unskilled workers into skilled-labor 

abundant countries 


More on the Trade Explanation 

 

 

 

 

Remember the logic behind the use of the Stolper- 

Samuelson theorem 

Under autarky, skilled-labor abundant countries 

feature relatively low prices for skill-intensive goods 

Trade with unskilled-labor abundant countries will 

put upward pressure on those relative prices 

This is where Stolper-Samuelson is useful and tells 

us that w S /w U will increase (and real wages of 

unskilled workers will decrease) 


Problems with the Trade Explanation 

 

 

As appealing as the Stolper-Samuelson logic is, 

there are several problems with the trade 

explanation 

In particular, data on the following objects is 

problematic: 

1. sectoral-shifts of employment; 

2. relative prices of skilled- vs. unskilled-intensive 

industries; 

3. changes in wage inequality in less developed economies 


Sectoral Shifts of Employment 

 

 

 

According to the trade explanation, we should have 

observed the increase in the relative demand for skill 

resulting from shifts in the sectoral distribution of 

employment 

• expansion of skill-intensive industry 

Instead, most shifts in employment (skill upgrading) 

occured within industries 

But with factor substitution, the Heckscher-Ohlin 

model predicts that an increase in w S /w U would lead 

to a decrease in skill-to-unskilled labor ratio in both 

sectors (see next slide) 


Within-Industry Skill Downgrading 

 

In the theory… 

Pol Antràs (Harvard) – Spring 2013 

Economics 1535: Lecture 13 13

Within-Industry Skill Upgrading 

 

In the data… 


Economics 1535: Lecture 13 14

Within-Industry Skill Upgrading 


Relative Goods Prices 

 

 

 

In most developed countries, prices in skill-intensive 

industries have fallen relative to prices in unskilledintensive 

industries (see Lawrence and Slaughter, 

1993, or next slide) 

Remember that the only reason why w S /w U increases 

in the H-O model is because the relative price of 

skill-intensive goods goes up! 

So according to the price data, we would have 

expected a fall in the wage premium! 


Relative Goods Prices (cted.) 


Wage Inequality in Skill-Scarce Countries 

 

 

 

Several authors have documented that trade 

integration is associated with increased wage 

inequality in some less developed economies too 

According to the H-O model, we would have 

predicted that w S /w U should have fallen in less 

developed economies 

But we do not observe this in the data (see Goldberg 

and Pavcnik, JEL, 2007) 


Skill-Biased Technological Change 

The skill-biased technological change hypothesis is 

instead consistent with the three facts above 

1. Computerization led to an increase in the relative 

employment of skilled workers in all industries 

2. Computerization led to productivity increases (and 

lower prices), with the effect disproportionate in 

skill-intensive industries 

3. Computerization is a worldwide phenomenon, so it 

is consistent with increased wage inequality 

worldwide 


Resuscitating the Trade Hypothesis 

Feenstra and Hanson have attempted to rehabilitate 

the trade hypothesis 

Their defense of the importance of trade is based on 

the following observations: 

1. A substantial part of the increase in international 

trade in recent years is associated with a vertical 

disintegration of the production process within 

industries 


Resuscitating the Trade Hypothesis 

2. Offshoring naturally increases the relative demand 

of skill in North. Perhaps more surprisingly, it may 

also increase it in South (in models with many 

goods) 

3. Finally, these types of models do not have clear 

predictions for the cross-section of final-good 

prices, so the Lawrence-Slaughter critique does not 

apply 



What About Migration? 

 

 

 

 

As we already discussed in Lecture 10, there is no 

convincing evidence regarding a significant causal 

effect of immigration on U.S. wages 

It turns out that one can (theoretically) use the 

Heckscher-Ohlin framework to rationalize this 

This relates to the fact that, as long as the economy 

produces both goods and is small so it faces 

exogenous good prices, factor prices are insensitive 

to factor endowments 

The next slides discuss this in more detail 



A Two-Good Model: Heckscher-Ohlin 

 

 

 

 

 

Suppose we have a country (Home) that is endowed with 

skilled and unskilled labor 

Suppose it can produce two goods, textiles (T) and 

computers (C) with its endowments 

• Textiles are unskilled-labor intensive and computers 

are skilled-labor intensive 

Preferences are homothetic over these two goods 

For the moment, suppose the country is closed to trade, 

but experiences an increase in the unskilled labor force 

through immigration 

This results in “biased” growth towards the textile sector 


Effect of Immigration on Factor Prices 

 

 

 

 

 

As a result, the price of textiles relative to computers falls 

By Stolper-Samuelson, this implies that the wage premium 

increases 

“Native” unskilled workers lose relative to native skilled 

workers, and also lose absolutely 

• Unskilled wage falls in terms of both goods 

“Native” skilled workers gain absolutely 

• Skilled wage increases in terms of both goods 

This is a scenario that labor economists often have in 

mind when thinking about the effect of immigration in the 

US 


Factor Price Insensitivity 

 

 

 

 

Now consider the case where Home is trading with the 

rest of the world 

Suppose we are talking about a small open economy that 

takes world relative prices P C /P T as given 

Then as long as the change in relative factor supply (i.e., 

the increase in L) is not so big that the country ends up 

specializing in textiles, the wage premium will be 

unchanged! 

Conclusion: considering trade in goods is important for 

studying the effect of immigration on native factors of 

production 


Evidence from the Mariel Boatlift 

 

Evidence of 

minor 

departure in 

Miami’s 

specialization 

trends relative 

to that of 

comparison 

cities 



Next Time 

 

 

 

 

 

Motivate the need for new models of trade 

Define increasing returns to scale and their 

implications for market structure 

Develop the theory of external economies and its 

implications for the causes and effects of trade 

Discuss the implications of dynamic economies of 

scale 

Review basic models of imperfect competition

Economics 1535: Lecture 13 - iSites

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