Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of...
Transcript of Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of...
![Page 1: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/1.jpg)
Why Has Inequality Been Rising? (based on work with M. Kremer)
E. Maskin
I.S.E.O. Summer School June 2017
![Page 2: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/2.jpg)
2
• In last 30 years, significant increase in income inequality
![Page 3: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/3.jpg)
3
• In last 30 years, significant increase in income inequality – in many rich countries (including U.S.)
![Page 4: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/4.jpg)
4
• In last 30 years, significant increase in income inequality – in many rich countries (including U.S.) – in many poor countries (including India and
Mexico)
![Page 5: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/5.jpg)
5
• In last 30 years, significant increase in income inequality – in many rich countries (including U.S.) – in many poor countries (including India and
Mexico) • referring here to inequality increases within
countries
![Page 6: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/6.jpg)
6
• In last 30 years, significant increase in income inequality – in many rich countries (including U.S.) – in many poor countries (including India and
Mexico) • referring here to inequality increases within
countries – inequality has been falling across countries
![Page 7: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/7.jpg)
7
• In last 30 years, significant increase in income inequality – in many rich countries (including U.S.) – in many poor countries (including India and
Mexico) • referring here to inequality increases within
countries – inequality has been falling across countries – many poor countries (especially India and
China) are catching up
![Page 8: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/8.jpg)
8
• In last 30 years, significant increase in income inequality – in many rich countries (including U.S.) – in many poor countries (including India and
Mexico) • referring here to inequality increases within
countries – inequality has been falling across countries – many poor countries (especially India and
China) are catching up • Increases are theoretically puzzling
![Page 9: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/9.jpg)
9
First, take inequality increase in U.S.
![Page 10: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/10.jpg)
10
First, take inequality increase in U.S. • well accepted relationship
![Page 11: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/11.jpg)
11
First, take inequality increase in U.S. • well accepted relationship wage education/training (skill) ↔
![Page 12: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/12.jpg)
12
First, take inequality increase in U.S. • well accepted relationship wage education/training (skill) • dispersion of skill has risen in U.S. (also the
median)
↔
![Page 13: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/13.jpg)
13
First, take inequality increase in U.S. • well accepted relationship wage education/training (skill) • dispersion of skill has risen in U.S. (also the
median) • but not nearly so much as dispersion in income
↔
![Page 14: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/14.jpg)
14
First, take inequality increase in U.S. • well accepted relationship wage education/training (skill) • dispersion of skill has risen in U.S. (also the
median) • but not nearly so much as dispersion in income
– holding wage as a function of skill fixed, shift in skill distribution explains only 20% of increase in income dispersion between 1980 and 2000
↔
![Page 15: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/15.jpg)
15
First, take inequality increase in U.S. • well accepted relationship wage education/training (skill) • dispersion of skill has risen in U.S. (also the
median) • but not nearly so much as dispersion in income
– holding wage as a function of skill fixed, shift in skill distribution explains only 20% of increase in income dispersion between 1980 and 2000
– but wage schedule not fixed
↔
![Page 16: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/16.jpg)
16
First, take inequality increase in U.S. • well accepted relationship wage education/training (skill) • dispersion of skill has risen in U.S. (also the
median) • but not nearly so much as dispersion in income
– holding wage as a function of skill fixed, shift in skill distribution explains only 20% of increase in income dispersion between 1980 and 2000
– but wage schedule not fixed • Why not?
↔
![Page 17: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/17.jpg)
17
• One popular answer: skill-biased technological change
![Page 18: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/18.jpg)
18
• One popular answer: skill-biased technological change – technology biased in favor of high skills
![Page 19: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/19.jpg)
19
• One popular answer: skill-biased technological change – technology biased in favor of high skills – marginal product of high-skill workers enhanced their wages rise relative to low-skill workers’ wages
⇒
![Page 20: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/20.jpg)
20
• One popular answer: skill-biased technological change – technology biased in favor of high skills – marginal product of high-skill workers enhanced their wages rise relative to low-skill workers’ wages
• Objection:
⇒
![Page 21: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/21.jpg)
21
• One popular answer: skill-biased technological change – technology biased in favor of high skills – marginal product of high-skill workers enhanced their wages rise relative to low-skill workers’ wages
• Objection: – difficult to measure such technological change
⇒
![Page 22: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/22.jpg)
22
• One popular answer: skill-biased technological change – technology biased in favor of high skills – marginal product of high-skill workers enhanced their wages rise relative to low-skill workers’ wages
• Objection: – difficult to measure such technological change – rather complicated theory
⇒
![Page 23: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/23.jpg)
23
• One popular answer: skill-biased technological change – technology biased in favor of high skills – marginal product of high-skill workers enhanced their wages rise relative to low-skill workers’ wages
• Objection: – difficult to measure such technological change – rather complicated theory
• Propose a different (simpler) theory based on matching
⇒
![Page 24: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/24.jpg)
24
• One popular answer: skill-biased technological change – technology biased in favor of high skills – marginal product of high-skill workers enhanced their wages rise relative to low-skill workers’ wages
• Objection: – difficult to measure such technological change – rather complicated theory
• Propose a different (simpler) theory based on matching – firm matches workers of different skills to produce output
⇒
![Page 25: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/25.jpg)
25
• One popular answer: skill-biased technological change – technology biased in favor of high skills – marginal product of high-skill workers enhanced their wages rise relative to low-skill workers’ wages
• Objection: – difficult to measure such technological change – rather complicated theory
• Propose a different (simpler) theory based on matching – firm matches workers of different skills to produce output – as skill dispersion and median increase, pattern of matching
between workers of different skills within firm changes
⇒
![Page 26: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/26.jpg)
26
• One popular answer: skill-biased technological change – technology biased in favor of high skills – marginal product of high-skill workers enhanced their wages rise relative to low-skill workers’ wages
• Objection: – difficult to measure such technological change – rather complicated theory
• Propose a different (simpler) theory based on matching – firm matches workers of different skills to produce output – as skill dispersion and median increase, pattern of matching
between workers of different skills within firm changes – can induce even bigger increase in income dispersion
⇒
![Page 27: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/27.jpg)
27
• One popular answer: skill-biased technological change – technology biased in favor of high skills – marginal product of high-skill workers enhanced their wages rise relative to low-skill workers’ wages
• Objection: – difficult to measure such technological change – rather complicated theory
• Propose a different (simpler) theory based on matching – firm matches workers of different skills to produce output – as skill dispersion and median increase, pattern of matching
between workers of different skills within firm changes – can induce even bigger increase in income dispersion – leads to greater relative segregation of skill within firms
⇒
![Page 28: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/28.jpg)
28
• This last prediction is novel to our theory: variation of skills within firm falls relative to
variation across firms
![Page 29: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/29.jpg)
29
• This last prediction is novel to our theory: variation of skills within firm falls relative to
variation across firms • Illustrative examples
![Page 30: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/30.jpg)
30
• This last prediction is novel to our theory: variation of skills within firm falls relative to
variation across firms • Illustrative examples
– General Motors: typical large firm of generation ago mixed high-skill labor (engineers) with low-skill labor (assembly-line workers)
![Page 31: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/31.jpg)
31
• This last prediction is novel to our theory: variation of skills within firm falls relative to
variation across firms • Illustrative examples
– General Motors: typical large firm of generation ago mixed high-skill labor (engineers) with low-skill labor (assembly-line workers) – typical firms of today:
![Page 32: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/32.jpg)
32
• This last prediction is novel to our theory: variation of skills within firm falls relative to
variation across firms • Illustrative examples
– General Motors: typical large firm of generation ago mixed high-skill labor (engineers) with low-skill labor (assembly-line workers) – typical firms of today: Microsoft (mainly high-skill) and
![Page 33: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/33.jpg)
33
• This last prediction is novel to our theory: variation of skills within firm falls relative to
variation across firms • Illustrative examples
– General Motors: typical large firm of generation ago mixed high-skill labor (engineers) with low-skill labor (assembly-line workers) – typical firms of today: Microsoft (mainly high-skill) and McDonald’s (mainly low-skill)
![Page 34: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/34.jpg)
34
• This last prediction is novel to our theory: variation of skills within firm falls relative to
variation across firms • Illustrative examples
– General Motors: typical large firm of generation ago mixed high-skill labor (engineers) with low-skill labor (assembly-line workers) – typical firms of today: Microsoft (mainly high-skill) and McDonald’s (mainly low-skill)
• segregation prediction borne out by evidence for U.S., U.K., and France
![Page 35: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/35.jpg)
35
Second, growth of inequality in Mexico
![Page 36: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/36.jpg)
36
Second, growth of inequality in Mexico • followed a period of liberalized trade
![Page 37: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/37.jpg)
37
Second, growth of inequality in Mexico • followed a period of liberalized trade
– Mexico joined GATT in 1985
![Page 38: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/38.jpg)
38
Second, growth of inequality in Mexico • followed a period of liberalized trade
– Mexico joined GATT in 1985 – in 2 years average tariffs fell by 50%
![Page 39: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/39.jpg)
39
Second, growth of inequality in Mexico • followed a period of liberalized trade
– Mexico joined GATT in 1985 – in 2 years average tariffs fell by 50% – FDI quadrupled
![Page 40: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/40.jpg)
40
Second, growth of inequality in Mexico • followed a period of liberalized trade
– Mexico joined GATT in 1985 – in 2 years average tariffs fell by 50% – FDI quadrupled
• white-collar wages increased by 16%
![Page 41: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/41.jpg)
41
Second, growth of inequality in Mexico • followed a period of liberalized trade
– Mexico joined GATT in 1985 – in 2 years average tariffs fell by 50% – FDI quadrupled
• white-collar wages increased by 16% • blue-collar wages fell by 14%
![Page 42: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/42.jpg)
42
Second, growth of inequality in Mexico • followed a period of liberalized trade
– Mexico joined GATT in 1985 – in 2 years average tariffs fell by 50% – FDI quadrupled
• white-collar wages increased by 16% • blue-collar wages fell by 14% • globalization (increase in trade) aggravated
inequality
![Page 43: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/43.jpg)
43
Contradicts Heckscher-Ohlin theory
![Page 44: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/44.jpg)
44
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor
![Page 45: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/45.jpg)
45
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
![Page 46: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/46.jpg)
46
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
– high-skill labor in short supply, so commands especially high wage
![Page 47: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/47.jpg)
47
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
– high-skill labor in short supply, so commands especially high wage – low-skill labor paid correspondingly poorly
![Page 48: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/48.jpg)
48
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
– high-skill labor in short supply, so commands especially high wage – low-skill labor paid correspondingly poorly
• opposite true in U.S.:
![Page 49: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/49.jpg)
49
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
– high-skill labor in short supply, so commands especially high wage – low-skill labor paid correspondingly poorly
• opposite true in U.S.: – high-skill labor gets comparatively low wage
![Page 50: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/50.jpg)
50
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
– high-skill labor in short supply, so commands especially high wage – low-skill labor paid correspondingly poorly
• opposite true in U.S.: – high-skill labor gets comparatively low wage – low-skill labor paid comparatively well
![Page 51: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/51.jpg)
51
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
– high-skill labor in short supply, so commands especially high wage – low-skill labor paid correspondingly poorly
• opposite true in U.S.: – high-skill labor gets comparatively low wage – low-skill labor paid comparatively well
• after trade opened, factor prices should equalize
![Page 52: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/52.jpg)
52
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
– high-skill labor in short supply, so commands especially high wage – low-skill labor paid correspondingly poorly
• opposite true in U.S.: – high-skill labor gets comparatively low wage – low-skill labor paid comparatively well
• after trade opened, factor prices should equalize – high-skill wages in Mexico should fall
![Page 53: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/53.jpg)
53
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
– high-skill labor in short supply, so commands especially high wage – low-skill labor paid correspondingly poorly
• opposite true in U.S.: – high-skill labor gets comparatively low wage – low-skill labor paid comparatively well
• after trade opened, factor prices should equalize – high-skill wages in Mexico should fall – low-skill wages in Mexico rise
![Page 54: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/54.jpg)
54
Contradicts Heckscher-Ohlin theory • Mexico has comparative advantage in low-skill labor • in autarky,
– high-skill labor in short supply, so commands especially high wage – low-skill labor paid correspondingly poorly
• opposite true in U.S.: – high-skill labor gets comparatively low wage – low-skill labor paid comparatively well
• after trade opened, factor prices should equalize – high-skill wages in Mexico should fall – low-skill wages in Mexico rise
• trade should decrease inequality in Mexico
![Page 55: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/55.jpg)
55
• Will argue that same matching model explains Mexico’s higher inequality
![Page 56: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/56.jpg)
56
• Will argue that same matching model explains Mexico’s higher inequality
• But first return to inequality in U.S. (also U.K. and France)
![Page 57: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/57.jpg)
57
• 1-good economy
![Page 58: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/58.jpg)
58
• 1-good economy • good produced by competitive firms
![Page 59: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/59.jpg)
59
• 1-good economy • good produced by competitive firms • labor only input
![Page 60: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/60.jpg)
60
• 1-good economy • good produced by competitive firms • labor only input • labor comes in 3 skill levels q L < M < H
![Page 61: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/61.jpg)
61
• 1-good economy • good produced by competitive firms • labor only input • labor comes in 3 skill levels q L < M < H • proportion of workers having skill q
( )p q =
![Page 62: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/62.jpg)
62
All firms have same production process
![Page 63: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/63.jpg)
63
All firms have same production process • 2 tasks
![Page 64: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/64.jpg)
64
All firms have same production process • 2 tasks
– one “managerial” - - sensitive to skill level
![Page 65: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/65.jpg)
65
All firms have same production process • 2 tasks
– one “managerial” - - sensitive to skill level – one “subordinate” - - less sensitive to skill output = 2
s mq q
![Page 66: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/66.jpg)
66
All firms have same production process • 2 tasks
– one “managerial” - - sensitive to skill level – one “subordinate” - - less sensitive to skill output =
• formula incorporates 3 critical features
2s mq q
![Page 67: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/67.jpg)
67
All firms have same production process • 2 tasks
– one “managerial” - - sensitive to skill level – one “subordinate” - - less sensitive to skill output =
• formula incorporates 3 critical features (i) workers of different skills imperfect substitutes
2s mq q
![Page 68: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/68.jpg)
68
All firms have same production process • 2 tasks
– one “managerial” - - sensitive to skill level – one “subordinate” - - less sensitive to skill output =
• formula incorporates 3 critical features (i) workers of different skills imperfect substitutes (ii) different tasks within firm complementary
2s mq q
![Page 69: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/69.jpg)
69
All firms have same production process • 2 tasks
– one “managerial” - - sensitive to skill level – one “subordinate” - - less sensitive to skill output =
• formula incorporates 3 critical features (i) workers of different skills imperfect substitutes (ii) different tasks within firm complementary (iii) different tasks differentially sensitive to skill
2s mq q
![Page 70: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/70.jpg)
70
(i) workers of different skills imperfect substitutes
![Page 71: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/71.jpg)
71
(i) workers of different skills imperfect substitutes
• if perfect substitutability, q-worker (worker of skill q) can be replaced by 2 -workers
2q
![Page 72: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/72.jpg)
72
(i) workers of different skills imperfect substitutes
• if perfect substitutability, q-worker (worker of skill q) can be replaced by 2 -workers
• so, no prediction about skill levels in firm - - no segregation
2q
![Page 73: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/73.jpg)
73
(i) workers of different skills imperfect substitutes
• if perfect substitutability, q-worker (worker of skill q) can be replaced by 2 -workers
• so, no prediction about skill levels in firm - - no segregation • q-worker always paid twice as much as -worker
2q
2q
![Page 74: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/74.jpg)
74
(i) workers of different skills imperfect substitutes
• if perfect substitutability, q-worker (worker of skill q) can be replaced by 2 -workers
• so, no prediction about skill levels in firm - - no segregation • q-worker always paid twice as much as -worker
– so inequality between q-worker and -worker can’t increase
2q
2q
2q
![Page 75: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/75.jpg)
75
(ii) different tasks complementary
![Page 76: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/76.jpg)
76
(ii) different tasks complementary • if instead
![Page 77: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/77.jpg)
77
(ii) different tasks complementary • if instead
( ) ( )output s mf q g q= +
![Page 78: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/78.jpg)
78
(ii) different tasks complementary • if instead
optimal choice of independent of that of
( ) ( )output s mf q g q= +
sq mq
![Page 79: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/79.jpg)
79
(ii) different tasks complementary • if instead
optimal choice of independent of that of • so again no prediction about combination of
skill levels in firm
( ) ( )output s mf q g q= +
sq mq
![Page 80: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/80.jpg)
80
(iii) different tasks differentially sensitive to skill
![Page 81: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/81.jpg)
81
(iii) different tasks differentially sensitive to skill • if instead
![Page 82: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/82.jpg)
82
(iii) different tasks differentially sensitive to skill • if instead
output ,s mq q=
![Page 83: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/83.jpg)
83
(iii) different tasks differentially sensitive to skill • if instead
get complete segregation of skill:
output ,s mq q=
s mq q=
![Page 84: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/84.jpg)
84
(iii) different tasks differentially sensitive to skill • if instead
get complete segregation of skill:
– fully assortative matching
output ,s mq q=
s mq q=
![Page 85: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/85.jpg)
85
(iii) different tasks differentially sensitive to skill • if instead
get complete segregation of skill:
– fully assortative matching • differential sensitivity
output ,s mq q=
s mq q=
2output s mq q=
![Page 86: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/86.jpg)
86
(iii) different tasks differentially sensitive to skill • if instead
get complete segregation of skill:
– fully assortative matching • differential sensitivity
– still have some assortative matching
output ,s mq q=
s mq q=
2output s mq q=
![Page 87: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/87.jpg)
87
(iii) different tasks differentially sensitive to skill • if instead
get complete segregation of skill:
– fully assortative matching • differential sensitivity
– still have some assortative matching – also have second force
output ,s mq q=
s mq q=
2output s mq q=
![Page 88: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/88.jpg)
88
(iii) different tasks differentially sensitive to skill • if instead
get complete segregation of skill:
– fully assortative matching • differential sensitivity
– still have some assortative matching – also have second force
output ,s mq q=
s mq q=
implies m sq q>
2output s mq q=
![Page 89: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/89.jpg)
89
Competitive equilibrium
![Page 90: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/90.jpg)
90
Competitive equilibrium • wage schedule ( )w q∗
![Page 91: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/91.jpg)
91
Competitive equilibrium • wage schedule • matching rule
( )w q∗
![Page 92: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/92.jpg)
92
Competitive equilibrium • wage schedule • matching rule
( ), equilibrium fraction of matches with , s m
q qq q q q
π ′ =
′= =
( )w q∗
![Page 93: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/93.jpg)
93
Competitive equilibrium • wage schedule • matching rule
( )
( )( ) ( )2
, ,, arg max , (output maximized)
q qq q q q
ππ π∗
⋅ ⋅ ′
′ ′⋅ ⋅ = ∑
( ), equilibrium fraction of matches with , s m
q qq q q q
π ′ =
′= =
( )w q∗
![Page 94: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/94.jpg)
94
Competitive equilibrium • wage schedule • matching rule
( )
( )( ) ( )2
, ,, arg max , (output maximized)
q qq q q q
ππ π∗
⋅ ⋅ ′
′ ′⋅ ⋅ = ∑
( ), equilibrium fraction of matches with , s m
q qq q q q
π ′ =
′= =
( )w q∗
( ) ( ) ( )2 0q q w q w q∗ ∗′ ′− − ≤
![Page 95: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/95.jpg)
95
Competitive equilibrium • wage schedule • matching rule
( )
( )( ) ( )2
, ,, arg max , (output maximized)
q qq q q q
ππ π∗
⋅ ⋅ ′
′ ′⋅ ⋅ = ∑
( ), equilibrium fraction of matches with , s m
q qq q q q
π ′ =
′= =
( )w q∗
( ) ( ) ( )2 0q q w q w q∗ ∗′ ′− − ≤
( ) equality if , 0 (no profit in equilibrium)q qπ ∗ ′− >
![Page 96: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/96.jpg)
96
suppose
![Page 97: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/97.jpg)
97
suppose
( ) ( ) ( ) 13p L p M p H= = =
![Page 98: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/98.jpg)
98
suppose
claim: if low dispersion ( 2 ), thenH L<
( ) ( ) ( ) 13p L p M p H= = =
![Page 99: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/99.jpg)
99
suppose
( ) ( ) ( ) 13, , ,L M L H M Hπ π π∗ ∗ ∗= = =
claim: if low dispersion ( 2 ), thenH L<
( ) ( ) ( ) 13p L p M p H= = =
![Page 100: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/100.jpg)
100
suppose
•
( ) ( ) ( ) 13, , ,L M L H M Hπ π π∗ ∗ ∗= = =
claim: if low dispersion ( 2 ), thenH L<
( ) ( ) ( ) 13p L p M p H= = =
3 2 2>
![Page 101: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/101.jpg)
101
suppose
• • so
( ) ( ) ( ) 13, , ,L M L H M Hπ π π∗ ∗ ∗= = =
claim: if low dispersion ( 2 ), thenH L<
( ) ( ) ( ) 13p L p M p H= = =
3 2 2>3 3 34 2 2 , and soL L L> +
![Page 102: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/102.jpg)
102
suppose
• • so
( ) ( ) ( ) 13, , ,L M L H M Hπ π π∗ ∗ ∗= = =
claim: if low dispersion ( 2 ), thenH L<
( ) ( ) ( ) 13p L p M p H= = =
3 2 2>3 3 34 2 2 , and soL L L> +
2 3 3(1) 2LM L M> +
![Page 103: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/103.jpg)
103
suppose
• • so
• if then
( ) ( ) ( ) 13, , ,L M L H M Hπ π π∗ ∗ ∗= = =
claim: if low dispersion ( 2 ), thenH L<
( ) ( ) ( ) 13p L p M p H= = =
( ), 0 ( -workers "self-matched")L L Lπ ∗ >
3 2 2>3 3 34 2 2 , and soL L L> +
2 3 3(1) 2LM L M> +
![Page 104: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/104.jpg)
104
suppose
• • so
• if then
( ) ( ) ( ) 13, , ,L M L H M Hπ π π∗ ∗ ∗= = =
claim: if low dispersion ( 2 ), thenH L<
( ) ( ) ( ) 13p L p M p H= = =
( ), 0 ( -workers "self-matched")L L Lπ ∗ >
( ), 0 from (1)M Mπ ∗ =
3 2 2>3 3 34 2 2 , and soL L L> +
2 3 3(1) 2LM L M> +
![Page 105: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/105.jpg)
105 105
− +
( ) 2 3 3 similarly, , 0 because 2 H H LH L Hπ ∗ = >
![Page 106: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/106.jpg)
106 106
− + − hence,
( ) 2 3 3 similarly, , 0 because 2 H H LH L Hπ ∗ = >
( ) , 0M Hπ ∗ >
![Page 107: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/107.jpg)
107 107
− + − hence, − but
( ) 2 3 3 similarly, , 0 because 2 H H LH L Hπ ∗ = >
( ) , 0M Hπ ∗ >2 2 3 2 , contradictionLM LH L MH+ > +
![Page 108: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/108.jpg)
108 108
− + − hence, − but • hence,
( ) ( ) ( ) , 0; similarly , , 0L L M M H Hπ π π∗ ∗= = =
( ) 2 3 3 similarly, , 0 because 2 H H LH L Hπ ∗ = >
( ) , 0M Hπ ∗ >2 2 3 2 , contradictionLM LH L MH+ > +
![Page 109: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/109.jpg)
109 109
− + − hence, − but • hence, • +
( ) ( ) ( ) , 0; similarly , , 0L L M M H Hπ π π∗ ∗= = =
( ) 2 3 3 similarly, , 0 because 2 H H LH L Hπ ∗ = >
( ) , 0M Hπ ∗ >2 2 3 2 , contradictionLM LH L MH+ > +
( ) ( )2 ,LM w L w M∗ ∗=
![Page 110: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/110.jpg)
110 110
− + − hence, − but • hence, • +
( ) ( ) ( ) , 0; similarly , , 0L L M M H Hπ π π∗ ∗= = =
( ) 2 3 3 similarly, , 0 because 2 H H LH L Hπ ∗ = >
( ) , 0M Hπ ∗ >2 2 3 2 , contradictionLM LH L MH+ > +
( ) ( )2 ,LM w L w M∗ ∗=
( ) ( )2 ,LH w L w H∗ ∗= +
![Page 111: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/111.jpg)
111 111
− + − hence, − but • hence, • +
( ) ( ) ( ) , 0; similarly , , 0L L M M H Hπ π π∗ ∗= = =
( ) 2 3 3 similarly, , 0 because 2 H H LH L Hπ ∗ = >
( ) , 0M Hπ ∗ >2 2 3 2 , contradictionLM LH L MH+ > +
( ) ( )2 ,LM w L w M∗ ∗=
( ) ( )2 ,LH w L w H∗ ∗= +
( ) ( )2MH w M w H∗ ∗= +
![Page 112: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/112.jpg)
112
•
( )2 2 2
2LM LH MHw L∗ + −
=
![Page 113: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/113.jpg)
113
•
( )2 2 2
2LM LH MHw L∗ + −
=
( )2 2 2
2LM MH LHw M∗ + −
=
![Page 114: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/114.jpg)
114
•
( )2 2 2
2LM LH MHw L∗ + −
=
( )2 2 2
2LM MH LHw M∗ + −
=
( )2 2 2
2LH MH LMw H∗ + −
=
![Page 115: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/115.jpg)
115
•
• Notice
( )2 2 2
2LM LH MHw L∗ + −
=
( )2 2 2
2LM MH LHw M∗ + −
=
( )2 2 2
2LH MH LMw H∗ + −
=
( ) ( )0 0w L w H
M M
∗ ∗∂ ∂> <
∂ ∂
![Page 116: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/116.jpg)
116
•
• Notice Proposition 1: Starting from low skill dispersion, ,
increase in median skill reduces inequality in wages (and raises mean and median wage)
( )2 2 2
2LM LH MHw L∗ + −
=
( )2 2 2
2LM MH LHw M∗ + −
=
( )2 2 2
2LH MH LMw H∗ + −
=
( ) ( )0 0w L w H
M M
∗ ∗∂ ∂> <
∂ ∂
2 H L<
![Page 117: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/117.jpg)
117
But opposite occurs if skill distribution dispersed
![Page 118: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/118.jpg)
118
But opposite occurs if skill distribution dispersed – claim: this what happened in U.S., U.K., and France
![Page 119: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/119.jpg)
119
But opposite occurs if skill distribution dispersed – claim: this what happened in U.S., U.K., and France
Proposition 2: Starting from sufficiently dispersed skill distribution
increase in median inequality:M magnifies( )34
3 2 and ,M L H M> >
![Page 120: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/120.jpg)
120
But opposite occurs if skill distribution dispersed – claim: this what happened in U.S., U.K., and France
Proposition 2: Starting from sufficiently dispersed skill distribution
increase in median inequality:M magnifies
( ) ( )0 and 0,w L w H
M M
∗ ∗∂ ∂≤ ≥
∂ ∂
( )343 2 and ,M L H M> >
![Page 121: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/121.jpg)
121
But opposite occurs if skill distribution dispersed – claim: this what happened in U.S., U.K., and France
Proposition 2: Starting from sufficiently dispersed skill distribution
and if either L-workers or M-workers not self-
matched, at least one equality strict
increase in median inequality:M magnifies
( ) ( )0 and 0,w L w H
M M
∗ ∗∂ ∂≤ ≥
∂ ∂
( )343 2 and ,M L H M> >
![Page 122: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/122.jpg)
122
Proof: Suppose
( ) ( ) ( ) 315 5p L p H p M= = =
![Page 123: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/123.jpg)
123
Proof: Suppose (2)
( ) ( ) ( ) 315 5p L p H p M= = =
2 3 3 2 3 32 2LM L M MH M H> + > +
![Page 124: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/124.jpg)
124
Proof: Suppose (2)
•
( ) , 0 because L H H Lπ ∗ = >>
( ) ( ) ( ) 315 5p L p H p M= = =
2 3 3 2 3 32 2LM L M MH M H> + > +
![Page 125: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/125.jpg)
125
Proof: Suppose (2)
•
•
( ) , 0 because L H H Lπ ∗ = >>
( ) ( ) ( ) 315 5p L p H p M= = =
2 3 3 2 3 32 2LM L M MH M H> + > +
* * ( , ) = ( , ) = 0 from (2)L L H Hπ π
![Page 126: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/126.jpg)
126
Proof: Suppose (2)
•
•
•
( ) , 0 because L H H Lπ ∗ = >>
( ) ( ) ( ) 315 5p L p H p M= = =
( ) ( ) ( )2 15 5, , ,L M M H M Mπ π π∗ ∗ ∗= = =
2 3 3 2 3 32 2LM L M MH M H> + > +
* * ( , ) = ( , ) = 0 from (2)L L H Hπ π
![Page 127: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/127.jpg)
127
Proof: Suppose (2)
•
•
•
•
( ) , 0 because L H H Lπ ∗ = >>
( ) ( ) ( ) 315 5p L p H p M= = =
( )3
(from self-matching)2
Mw M∗ =
( ) ( ) ( )2 15 5, , ,L M M H M Mπ π π∗ ∗ ∗= = =
2 3 3 2 3 32 2LM L M MH M H> + > +
* * ( , ) = ( , ) = 0 from (2)L L H Hπ π
![Page 128: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/128.jpg)
128
Proof: Suppose (2)
•
•
•
• •
( ) , 0 because L H H Lπ ∗ = >>
( ) ( ) ( ) 315 5p L p H p M= = =
( )3
(from self-matching)2
Mw M∗ =
( ) ( ) ( )2 15 5, , ,L M M H M Mπ π π∗ ∗ ∗= = =
( ) ( )3 3
2 2,2 2
M Mw L LM w H MH∗ ∗= − = −
2 3 3 2 3 32 2LM L M MH M H> + > +
* * ( , ) = ( , ) = 0 from (2)L L H Hπ π
![Page 129: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/129.jpg)
129
Proof: Suppose (2)
•
•
•
• •
•
( ) , 0 because L H H Lπ ∗ = >>
( ) ( ) ( ) 315 5p L p H p M= = =
( )3
(from self-matching)2
Mw M∗ =
( ) 243
32 0, since 2
w L MLM M LM
∗∂= − < >
∂
( ) ( ) ( )2 15 5, , ,L M M H M Mπ π π∗ ∗ ∗= = =
( ) ( )3 3
2 2,2 2
M Mw L LM w H MH∗ ∗= − = −
2 3 3 2 3 32 2LM L M MH M H> + > +
* * ( , ) = ( , ) = 0 from (2)L L H Hπ π
![Page 130: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/130.jpg)
130
Proof: Suppose (2)
•
•
•
• •
•
•
( ) , 0 because L H H Lπ ∗ = >>
( ) ( ) ( ) 315 5p L p H p M= = =
( )3
(from self-matching)2
Mw M∗ =
( ) 243
32 0, since 2
w L MLM M LM
∗∂= − < >
∂
( ) ( ) ( )2 15 5, , ,L M M H M Mπ π π∗ ∗ ∗= = =
( ) ( )3 3
2 2,2 2
M Mw L LM w H MH∗ ∗= − = −
( ) 22 3
23 0, since
2w H MH H M
M
∗∂= − > >
∂
2 3 3 2 3 32 2LM L M MH M H> + > +
* * ( , ) = ( , ) = 0 from (2)L L H Hπ π
![Page 131: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/131.jpg)
131
Segregation
![Page 132: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/132.jpg)
132
Segregation Index of relative segregation
![Page 133: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/133.jpg)
133
Segregation Index of relative segregation
,BB W
ρ =+
![Page 134: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/134.jpg)
134
Segregation Index of relative segregation
B = skill variation between firms
,BB W
ρ =+
![Page 135: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/135.jpg)
135
Segregation Index of relative segregation
B = skill variation between firms
( ) ( )2
2 - , mean skill in populationq q
q qq qµ π µ′+ ∗
′
′= =∑∑
,BB W
ρ =+
![Page 136: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/136.jpg)
136
Segregation Index of relative segregation
B = skill variation between firms W = skill variation within firms
( ) ( )2
2 - , mean skill in populationq q
q qq qµ π µ′+ ∗
′
′= =∑∑
,BB W
ρ =+
![Page 137: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/137.jpg)
137
Segregation Index of relative segregation
B = skill variation between firms W = skill variation within firms
( ) ( )2
2 - , mean skill in populationq q
q qq qµ π µ′+ ∗
′
′= =∑∑
,BB W
ρ =+
( ) ( )2 *2 ,q q
q qq q qπ′+
′
′= −∑∑
![Page 138: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/138.jpg)
138
Proposition 2: Suppose
![Page 139: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/139.jpg)
139
Proposition 2: Suppose
( ) ( ) ( ) ( ) mean skillp L p M M p H H M M+ + = =
![Page 140: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/140.jpg)
140
Proposition 2: Suppose
If dispersion of skills big enough, i.e.,
( ) ( ) ( ) ( ) mean skillp L p M M p H H M M+ + = =
![Page 141: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/141.jpg)
141
Proposition 2: Suppose
If dispersion of skills big enough, i.e.,
1 52
H L +
>
( ) ( ) ( ) ( ) mean skillp L p M M p H H M M+ + = =
![Page 142: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/142.jpg)
142
Proposition 2: Suppose
If dispersion of skills big enough, i.e., then mean-preserving spread in distribution increases
segregation index
1 52
H L +
>
( ) ( ) ( ) ( ) mean skillp L p M M p H H M M+ + = =
ρ
![Page 143: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/143.jpg)
143
Proof: Suppose
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
![Page 144: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/144.jpg)
144
Proof: Suppose
•
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
![Page 145: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/145.jpg)
145
Proof: Suppose
• • So
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
( ) 1 16 2,L Lπ ε∗ = +
![Page 146: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/146.jpg)
146
Proof: Suppose
• • So
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
( ) 13, 2M Hπ ε∗ = −
( ) 1 16 2,L Lπ ε∗ = +
![Page 147: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/147.jpg)
147
Proof: Suppose
• • So
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
( ) 13, 2M Hπ ε∗ = −
( ), 3H Hπ ε∗ =
( ) 1 16 2,L Lπ ε∗ = +
![Page 148: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/148.jpg)
148
Proof: Suppose
• • So
• B =
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
( ) ( ) ( )2 2 2
1 1 16 2 3 2 3
2 2 2L L M H H HM M Mε ε ε+ + + − + + − − + −
( ) 13, 2M Hπ ε∗ = −
( ), 3H Hπ ε∗ =
( ) 1 16 2,L Lπ ε∗ = +
![Page 149: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/149.jpg)
149
Proof: Suppose
• • So
• B =
• W =
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
( ) ( ) ( ) ( )2 2 2 2
1 1 1 16 2 3 3
1 12 2 32 2 2 2 2 2
L L M H M H H HL M H Hε ε ε ε+ + + + − + + − − + − − + −
( ) ( ) ( )2 2 2
1 1 16 2 3 2 3
2 2 2L L M H H HM M Mε ε ε+ + + − + + − − + −
( ) 13, 2M Hπ ε∗ = −
( ), 3H Hπ ε∗ =
( ) 1 16 2,L Lπ ε∗ = +
![Page 150: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/150.jpg)
150
Proof: Suppose
• • So
• B =
• W =
• B increasing in
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
( ) ( ) ( ) ( )2 2 2 2
1 1 1 16 2 3 3
1 12 2 32 2 2 2 2 2
L L M H M H H HL M H Hε ε ε ε+ + + + − + + − − + − − + −
( ) ( ) ( )2 2 2
1 1 16 2 3 2 3
2 2 2L L M H H HM M Mε ε ε+ + + − + + − − + −
ε
( ) 13, 2M Hπ ε∗ = −
( ), 3H Hπ ε∗ =
( ) 1 16 2,L Lπ ε∗ = +
![Page 151: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/151.jpg)
151
Proof: Suppose
• • So
• B =
• W =
• B increasing in
• W decreasing in
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
( ) ( ) ( ) ( )2 2 2 2
1 1 1 16 2 3 3
1 12 2 32 2 2 2 2 2
L L M H M H H HL M H Hε ε ε ε+ + + + − + + − − + − − + −
ε
( ) ( ) ( )2 2 2
1 1 16 2 3 2 3
2 2 2L L M H H HM M Mε ε ε+ + + − + + − − + −
ε
( ) 13, 2M Hπ ε∗ = −
( ), 3H Hπ ε∗ =
( ) 1 16 2,L Lπ ε∗ = +
![Page 152: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/152.jpg)
152
Proof: Suppose
• • So
• B =
• W =
• B increasing in
• W decreasing in
• So
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
( ) ( ) ( ) ( )2 2 2 2
1 1 1 16 2 3 3
1 12 2 32 2 2 2 2 2
L L M H M H H HL M H Hε ε ε ε+ + + + − + + − − + − − + −
ε
( ) ( ) ( )2 2 2
1 1 16 2 3 2 3
2 2 2L L M H H HM M Mε ε ε+ + + − + + − − + −
ε
increasing in BB W
ε+
( ) 13, 2M Hπ ε∗ = −
( ), 3H Hπ ε∗ =
( ) 1 16 2,L Lπ ε∗ = +
![Page 153: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/153.jpg)
153
Proof: Suppose
• • So
• B =
• W =
• B increasing in
• W decreasing in
• So • intuitively, B rises as weight in tails increases
2 3 2 3Then 2 2MH L LM H+ > +
( ) ( ) ( )1 13 32, 3, 4 and 2L M H p L p H p Mε ε= = = = = + = −
( ) ( ) ( ) ( )2 2 2 2
1 1 1 16 2 3 3
1 12 2 32 2 2 2 2 2
L L M H M H H HL M H Hε ε ε ε+ + + + − + + − − + − − + −
ε
( ) ( ) ( )2 2 2
1 1 16 2 3 2 3
2 2 2L L M H H HM M Mε ε ε+ + + − + + − − + −
ε
increasing in BB W
ε+
( ) 13, 2M Hπ ε∗ = −
( ), 3H Hπ ε∗ =
( ) 1 16 2,L Lπ ε∗ = +
![Page 154: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/154.jpg)
154
Return to globalization and Mexico
![Page 155: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/155.jpg)
155
Return to globalization and Mexico Puzzles:
![Page 156: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/156.jpg)
156
Return to globalization and Mexico Puzzles: • Mexico has comparative advantage in low-skill labor
![Page 157: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/157.jpg)
157
Return to globalization and Mexico Puzzles: • Mexico has comparative advantage in low-skill labor but
![Page 158: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/158.jpg)
158
Return to globalization and Mexico Puzzles: • Mexico has comparative advantage in low-skill labor but trade increased gap between high- and low-skill workers
![Page 159: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/159.jpg)
159
Return to globalization and Mexico Puzzles: • Mexico has comparative advantage in low-skill labor but trade increased gap between high- and low-skill workers
– contradicts Heckscher-Ohlin theory
![Page 160: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/160.jpg)
160
Return to globalization and Mexico Puzzles: • Mexico has comparative advantage in low-skill labor but trade increased gap between high- and low-skill workers
– contradicts Heckscher-Ohlin theory • H-O implies that as 2 countries become more different (in factor endowments),
should trade more
![Page 161: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/161.jpg)
161
Return to globalization and Mexico Puzzles: • Mexico has comparative advantage in low-skill labor but trade increased gap between high- and low-skill workers
– contradicts Heckscher-Ohlin theory • H-O implies that as 2 countries become more different (in factor endowments),
should trade more – hence, U.S. and Malawi should trade more than U.S. and Mexico (Malawi more different than Mexico from U.S.)
![Page 162: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/162.jpg)
162
Return to globalization and Mexico Puzzles: • Mexico has comparative advantage in low-skill labor but trade increased gap between high- and low-skill workers
– contradicts Heckscher-Ohlin theory • H-O implies that as 2 countries become more different (in factor endowments),
should trade more – hence, U.S. and Malawi should trade more than U.S. and Mexico (Malawi more different than Mexico from U.S.) – but Mexico trades much more than Malawi with U.S.
![Page 163: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/163.jpg)
163
Resolution:
![Page 164: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/164.jpg)
164
Resolution: • think of globalization as increase in
international production
![Page 165: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/165.jpg)
165
Resolution: • think of globalization as increase in
international production – Delhi call centers (outsourcing)
![Page 166: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/166.jpg)
166
Resolution: • think of globalization as increase in
international production – Delhi call centers (outsourcing) – computers
![Page 167: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/167.jpg)
167
Resolution: • think of globalization as increase in
international production – Delhi call centers (outsourcing) – computers
designed in U.S.
![Page 168: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/168.jpg)
168
Resolution: • think of globalization as increase in
international production – Delhi call centers (outsourcing) – computers
designed in U.S. programmed in Europe
![Page 169: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/169.jpg)
169
Resolution: • think of globalization as increase in
international production – Delhi call centers (outsourcing) – computers
designed in U.S. programmed in Europe assembled in China
![Page 170: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/170.jpg)
170
Resolution: • think of globalization as increase in
international production – Delhi call centers (outsourcing) – computers
designed in U.S. programmed in Europe assembled in China
• due to lower communication/transport costs
![Page 171: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/171.jpg)
171
• 2 countries – one rich, one poor
![Page 172: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/172.jpg)
172
• 2 countries – one rich, one poor – rich country
![Page 173: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/173.jpg)
173
• 2 countries – one rich, one poor – rich country
– workers of skill levels A and B
![Page 174: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/174.jpg)
174
• 2 countries – one rich, one poor – rich country
– workers of skill levels A and B
– poor country
![Page 175: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/175.jpg)
175
• 2 countries – one rich, one poor – rich country
– workers of skill levels A and B
– poor country – workers of skill levels C and D
![Page 176: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/176.jpg)
176
• 2 countries – one rich, one poor – rich country
– workers of skill levels A and B
– poor country – workers of skill levels C and D
A B C D> > >
![Page 177: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/177.jpg)
177
• 2 countries – one rich, one poor – rich country
– workers of skill levels A and B
– poor country – workers of skill levels C and D
A B C D> > >(conclusions still hold if )C B>
![Page 178: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/178.jpg)
178
• 2 countries – one rich, one poor – rich country
– workers of skill levels A and B
– poor country – workers of skill levels C and D
• production
A B C D> > >(conclusions still hold if )C B>
2output s mq q=
![Page 179: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/179.jpg)
179
• 2 countries – one rich, one poor – rich country
– workers of skill levels A and B
– poor country – workers of skill levels C and D
• production • before globalization (i.e., in autarky), workers can
match only domestically
A B C D> > >(conclusions still hold if )C B>
2output s mq q=
![Page 180: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/180.jpg)
180
• 2 countries – one rich, one poor – rich country
– workers of skill levels A and B
– poor country – workers of skill levels C and D
• production • before globalization (i.e., in autarky), workers can
match only domestically • after globalization, international matching possible
A B C D> > >(conclusions still hold if )C B>
2output s mq q=
![Page 181: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/181.jpg)
181
countrypoor
countryrich
DCBA >>>
![Page 182: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/182.jpg)
182
Proposition 3: If D-workers have sufficiently low skill, i.e.,
countrypoor
countryrich
DCBA >>>
![Page 183: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/183.jpg)
183
Proposition 3: If D-workers have sufficiently low skill, i.e.,
(*)
countrypoor
countryrich
DCBA >>>
1 5 ,2
B D +
>
![Page 184: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/184.jpg)
184
Proposition 3: If D-workers have sufficiently low skill, i.e.,
(*) then globalization increases inequality in poor
country
countrypoor
countryrich
DCBA >>>
1 5 ,2
B D +
>
![Page 185: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/185.jpg)
185
Proof: 2 cases
1 5(*) 2
B D +
>
rich poor country country
A B C D> > >
![Page 186: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/186.jpg)
186
Proof: 2 cases
Case I
1 5(*) 2
B D +
>
rich poor country country
A B C D> > >
( ) ( )p D p C>
![Page 187: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/187.jpg)
187
Proof: 2 cases
Case I •
1 5(*) 2
B D +
>
rich poor country country
A B C D> > >
( ) ( )p D p C>
( ), 0,a D Dπ ∗ >
![Page 188: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/188.jpg)
188
Proof: 2 cases
Case I •
•
1 5(*) 2
B D +
>
rich poor country country
A B C D> > >
( ), 0 (because, from (*), -worker can't match with - or -worker)g D D D A Bπ ∗ >
( ) ( )3
2a gDw D w D∗ ∗= =
( ) ( )p D p C>
( ), 0,a D Dπ ∗ >
autarky post-globalizationa g= =
![Page 189: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/189.jpg)
189
Proof: 2 cases
Case I •
•
•
1 5(*) 2
B D +
>
rich poor country country
A B C D> > >
( ), 0 (because, from (*), -worker can't match with - or -worker)g D D D A Bπ ∗ >
( ) ( )3
2a gDw D w D∗ ∗= =
( ) ( )p D p C>
( ), 0,a D Dπ ∗ >
( ) ( ) because of possible matching with or g aw C w C B A∗ ∗≥
autarky post-globalizationa g= =
![Page 190: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/190.jpg)
190
Proof: 2 cases
Case I •
•
•
• Hence,
1 5(*) 2
B D +
>
rich poor country country
A B C D> > >
( ), 0 (because, from (*), -worker can't match with - or -worker)g D D D A Bπ ∗ >
( ) ( )3
2a gDw D w D∗ ∗= =
( ) ( ) ( ) ( ) - - globalization causes rise in inequalityg g a aw C w D w C w D∗ ∗ ∗ ∗− ≥ −
( ) ( )p D p C>
( ), 0,a D Dπ ∗ >
( ) ( ) because of possible matching with or g aw C w C B A∗ ∗≥
autarky post-globalizationa g= =
![Page 191: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/191.jpg)
191
Case II
( ) ( )p D p C<
rich poor
A B C D> > >
![Page 192: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/192.jpg)
192
Case II •
( ) ( )3
2max ,2a a
Dw D DC w C∗ ∗ ⇒ = −
( ) ( )p D p C<
( ) ( )3
, 02a a
CC C w Cπ ∗ ∗> ⇒ =
rich poor
A B C D> > >
![Page 193: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/193.jpg)
193
Case II •
•
( ) ( ) - - at worst -workers can self-match g aw C w C C∗ ∗≥
( ) ( )3
2max ,2a a
Dw D DC w C∗ ∗ ⇒ = −
( ) ( )p D p C<
( ) ( )3
, 02a a
CC C w Cπ ∗ ∗> ⇒ =
rich poor
A B C D> > >
![Page 194: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/194.jpg)
194
Case II •
•
•
( ) ( ) - - at worst -workers can self-match g aw C w C C∗ ∗≥
( ) ( )3
2max ,2a a
Dw D DC w C∗ ∗ ⇒ = −
( ) ( ) ( )3 3 3
2 2max , max ,2 2 2g g a
D D Cw D DC w C w D DC∗ ∗ ∗ = − ≤ = −
( ) ( )p D p C<
( ) ( )3
, 02a a
CC C w Cπ ∗ ∗> ⇒ =
rich poor
A B C D> > >
![Page 195: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/195.jpg)
195
Case II •
•
•
• Hence, again
( ) ( ) - - at worst -workers can self-match g aw C w C C∗ ∗≥
( ) ( )3
2max ,2a a
Dw D DC w C∗ ∗ ⇒ = −
( ) ( ) ( )3 3 3
2 2max , max ,2 2 2g g a
D D Cw D DC w C w D DC∗ ∗ ∗ = − ≤ = −
( ) ( )p D p C<
( ) ( )3
, 02a a
CC C w Cπ ∗ ∗> ⇒ =
( ) ( ) rises with globalizationw C w D∗ ∗−
rich poor
A B C D> > >
![Page 196: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/196.jpg)
196
Model also explains Malawi:
![Page 197: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/197.jpg)
197
Model also explains Malawi: • workers in Malawi have very low skills no international matching opportunities
⇒
![Page 198: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/198.jpg)
198
Policy?
![Page 199: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/199.jpg)
199
Policy? • How can D-workers benefit from globalization?
![Page 200: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/200.jpg)
200
Policy? • How can D-workers benefit from globalization? • Suppose can increase q by at cost q∆ ( )c q∆
![Page 201: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/201.jpg)
201
Policy? • How can D-workers benefit from globalization? • Suppose can increase q by at cost
– may give D better matching opportunities q∆ ( )c q∆
![Page 202: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/202.jpg)
202
Policy? • How can D-workers benefit from globalization? • Suppose can increase q by at cost
– may give D better matching opportunities • who will bear cost?
q∆ ( )c q∆
![Page 203: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/203.jpg)
203
Policy? • How can D-workers benefit from globalization? • Suppose can increase q by at cost
– may give D better matching opportunities • who will bear cost?
– not firm - - education raises worker’s productivity, but then have to pay higher wage
q∆ ( )c q∆
![Page 204: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/204.jpg)
204
Policy? • How can D-workers benefit from globalization? • Suppose can increase q by at cost
– may give D better matching opportunities • who will bear cost?
– not firm - - education raises worker’s productivity, but then have to pay higher wage – not worker perhaps can’t afford to pay
q∆ ( )c q∆
![Page 205: Why Has Inequality Been Rising? · Second, growth of inequality in Mexico • followed a period of liberalized trade – Mexico joined GATT in 1985 – in 2 years average tariffs](https://reader033.fdocuments.us/reader033/viewer/2022050218/5f63991e450e6b0de14fc2ae/html5/thumbnails/205.jpg)
205
Policy? • How can D-workers benefit from globalization? • Suppose can increase q by at cost
– may give D better matching opportunities • who will bear cost?
– not firm - - education raises worker’s productivity, but then have to pay higher wage – not worker perhaps can’t afford to pay – role for investment by third parties domestic government international agencies, NGOs foreign aid private foundations
q∆ ( )c q∆