Problem Set #3b ANSWERS
(Due Tuesday, September 30, 2008)
Read this article and answer the following questions. Tyler Cowen, “Why is Income
Inequality in America so Pronounced? Consider Education
”. The New York Times, May 17, 2007. The URL is:
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
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
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