Answer the following questions considering the Heckscher-Ohlin Model:

a) Explain the similarities and differences between the specific factors model and the Heckscher-Ohlin Model in terms of income distribution effects.

b) Write the discussions on increasing wage inequality in the United States after the 1970s.

ANSWER

a)

SIMILARITIES

In a Heckscher-Ohlin model, both factors, capital and labor, are assumed to be mobile.

DIFFERENCE

in production decisions, some factors are fixed (and hence specific) in the short run, but all factors are variable inputs in the long run. Hence, the HO model is a long-run model, whereas the specific factors model is a short run model in which capital and land inputs are fixed but labor is a variable input in production.

b)

U.S. government policies created an institutional framework that led to increasing inequality. Since the late 1970s, deregulation, de-unionization, tax changes, federal monetary policies, “the shareholder revolution,” and other policies reduced wages and employment. This explanation would seem to call for policy changes such as increasing unionization, better supervision of Wall Street, raising the minimum wage, and maintaining a full-employment focus in monetary policy, to address inequality and declining wages.

These three main explanations for income inequality show the difficulty in pointing to one cause of inequality over others. Researchers’ emphasis on disentangling causes of income inequality is relevant to understanding the issue, but it also highlights the complexity of factors that contribute to labor market inequality. Income inequality has no one cause. As such, any policy solutions that address inequality must match this nuance and acknowledge the various factors that contribute to inequality.