1
Chapter 4: Frameworks for Understanding Economic Inequality ........................................................... 3
1. The trade argument (Heckscher – Ohlin – Samuelson) ................................................................... 3
1.1. What? ....................................................................................................................................... 3
1.2. Criticism .................................................................................................................................... 3
2. The race between technology and education (Tinbergen) ............................................................. 4
2.1. What? ....................................................................................................................................... 4
2.2. Graphically ................................................................................................................................ 4
2.2. Criticism .................................................................................................................................... 4
3. The Kuznets curve (Kuznets) ........................................................................................................... 5
3.1. What? ....................................................................................................................................... 5
3.2. Criticism .................................................................................................................................... 5
3.3. Were his predictions correct? .................................................................................................. 6
4. Wealth accumulation argument (Piketty) ....................................................................................... 7
4.1. Some definitions ....................................................................................................................... 7
4.2. Some numbers.......................................................................................................................... 7
4.2.1. Belgium .............................................................................................................................. 7
4.2.2. Capital/Income ratios ........................................................................................................ 7
A) Europe (1870-2010) ............................................................................................................ 7
B) Belgium (1960-2018) ........................................................................................................... 8
C) China.................................................................................................................................... 8
4.2.3. Conclusion: There is a staunch (and general) increase in the capital income ratio .......... 9
A) Why? ................................................................................................................................... 9
B) Some numbers to illustrate ................................................................................................. 9
4.4. The wealth accumulation argument ...................................................................................... 10
4.4.1. What? .............................................................................................................................. 10
4.4.2. In formulas....................................................................................................................... 10
4.4.3. The dance between labour and capital ........................................................................... 10
A) What? ................................................................................................................................ 10
B) Some numbers to illustrate ............................................................................................... 11
4.4.4. Conclusions ...................................................................................................................... 12
5. Kuznets cycles (Milanovic) ............................................................................................................. 12
5.1. Introduction ............................................................................................................................ 12
5.2. Inequality in pre-industrial societies: the Inequality Possibility Frontier ............................... 12
5.3. Kuznets waves ........................................................................................................................ 13
5.3.1. In pre-industrial societies ................................................................................................ 13
A) What? ................................................................................................................................ 13
, 2
B) Bad and good forces that reduce inequality ..................................................................... 14
C) Graphically......................................................................................................................... 14
5.3.2. In industrialized societies ................................................................................................ 15
A) What? ................................................................................................................................ 15
B) Endogeneity and intertwinement ..................................................................................... 16
C) Good and bad factors reducing inequality ........................................................................ 16
D) Graphically ........................................................................................................................ 16
, 3
Chapter 4: Frameworks for Understanding Economic Inequality
1. The trade argument (Heckscher – Ohlin – Samuelson)
1.1. What?
Countries will export what they can most easily and abundantly produce: Countries will specialize in
and export goods that intensively use their abundant factors of production (like capital or labor) and
import goods that require their scarce factors.
Trade leads to an increase in the returns to the relatively abundant factors of production: When
countries engage in trade, they tend to specialize in producing goods that utilize their abundant
resources more effectively. This specialization leads to increased productivity and higher returns for
those abundant factors of production, such as skilled labor in advanced economies or less skilled
labor in developing countries.
Increased trade integration will raise demand for skilled workers in advanced countries and for less
skilled workers in developing countries: As trade between countries becomes more integrated…
• Advanced economies experience higher demand for skilled workers. This is because these
countries often have abundant capital and advanced technology, which complement skilled
labor.
• Developing countries, where unskilled labor is more abundant, see increased demand for less
skilled workers, especially in sectors like manufacturing and agriculture, which benefit from
lower labor costs
What does this mean for wage inequality?
• The increased demand for skilled workers in advanced economies due to trade integration
results in higher wages for skilled labor. This can exacerbate income inequality.
• The increased demand for less skilled workers in developing economies due to trade
integration results in higher wages for less skilled labor. This can decrease income inequality
and improve living standards.
1.2. Criticism
• Assumes that technology does not spread globally. In reality, technological advancements can
quickly cross borders, impacting comparative advantage and trade patterns.
• Operates under the assumption of perfect markets for capital and labor. In real-world
scenarios, markets are rarely perfect, which can affect the model's predictions
• Many empirical studies have found evidence that does not align with the predictions of the
HOS model
• Over time, there has been a trend across all sectors of the economy towards becoming more
reliant on skilled labor. This shift in skill intensity can alter the dynamics of comparative
advantage and trade patterns, which the HOS model may not fully account for.
Chapter 4: Frameworks for Understanding Economic Inequality ........................................................... 3
1. The trade argument (Heckscher – Ohlin – Samuelson) ................................................................... 3
1.1. What? ....................................................................................................................................... 3
1.2. Criticism .................................................................................................................................... 3
2. The race between technology and education (Tinbergen) ............................................................. 4
2.1. What? ....................................................................................................................................... 4
2.2. Graphically ................................................................................................................................ 4
2.2. Criticism .................................................................................................................................... 4
3. The Kuznets curve (Kuznets) ........................................................................................................... 5
3.1. What? ....................................................................................................................................... 5
3.2. Criticism .................................................................................................................................... 5
3.3. Were his predictions correct? .................................................................................................. 6
4. Wealth accumulation argument (Piketty) ....................................................................................... 7
4.1. Some definitions ....................................................................................................................... 7
4.2. Some numbers.......................................................................................................................... 7
4.2.1. Belgium .............................................................................................................................. 7
4.2.2. Capital/Income ratios ........................................................................................................ 7
A) Europe (1870-2010) ............................................................................................................ 7
B) Belgium (1960-2018) ........................................................................................................... 8
C) China.................................................................................................................................... 8
4.2.3. Conclusion: There is a staunch (and general) increase in the capital income ratio .......... 9
A) Why? ................................................................................................................................... 9
B) Some numbers to illustrate ................................................................................................. 9
4.4. The wealth accumulation argument ...................................................................................... 10
4.4.1. What? .............................................................................................................................. 10
4.4.2. In formulas....................................................................................................................... 10
4.4.3. The dance between labour and capital ........................................................................... 10
A) What? ................................................................................................................................ 10
B) Some numbers to illustrate ............................................................................................... 11
4.4.4. Conclusions ...................................................................................................................... 12
5. Kuznets cycles (Milanovic) ............................................................................................................. 12
5.1. Introduction ............................................................................................................................ 12
5.2. Inequality in pre-industrial societies: the Inequality Possibility Frontier ............................... 12
5.3. Kuznets waves ........................................................................................................................ 13
5.3.1. In pre-industrial societies ................................................................................................ 13
A) What? ................................................................................................................................ 13
, 2
B) Bad and good forces that reduce inequality ..................................................................... 14
C) Graphically......................................................................................................................... 14
5.3.2. In industrialized societies ................................................................................................ 15
A) What? ................................................................................................................................ 15
B) Endogeneity and intertwinement ..................................................................................... 16
C) Good and bad factors reducing inequality ........................................................................ 16
D) Graphically ........................................................................................................................ 16
, 3
Chapter 4: Frameworks for Understanding Economic Inequality
1. The trade argument (Heckscher – Ohlin – Samuelson)
1.1. What?
Countries will export what they can most easily and abundantly produce: Countries will specialize in
and export goods that intensively use their abundant factors of production (like capital or labor) and
import goods that require their scarce factors.
Trade leads to an increase in the returns to the relatively abundant factors of production: When
countries engage in trade, they tend to specialize in producing goods that utilize their abundant
resources more effectively. This specialization leads to increased productivity and higher returns for
those abundant factors of production, such as skilled labor in advanced economies or less skilled
labor in developing countries.
Increased trade integration will raise demand for skilled workers in advanced countries and for less
skilled workers in developing countries: As trade between countries becomes more integrated…
• Advanced economies experience higher demand for skilled workers. This is because these
countries often have abundant capital and advanced technology, which complement skilled
labor.
• Developing countries, where unskilled labor is more abundant, see increased demand for less
skilled workers, especially in sectors like manufacturing and agriculture, which benefit from
lower labor costs
What does this mean for wage inequality?
• The increased demand for skilled workers in advanced economies due to trade integration
results in higher wages for skilled labor. This can exacerbate income inequality.
• The increased demand for less skilled workers in developing economies due to trade
integration results in higher wages for less skilled labor. This can decrease income inequality
and improve living standards.
1.2. Criticism
• Assumes that technology does not spread globally. In reality, technological advancements can
quickly cross borders, impacting comparative advantage and trade patterns.
• Operates under the assumption of perfect markets for capital and labor. In real-world
scenarios, markets are rarely perfect, which can affect the model's predictions
• Many empirical studies have found evidence that does not align with the predictions of the
HOS model
• Over time, there has been a trend across all sectors of the economy towards becoming more
reliant on skilled labor. This shift in skill intensity can alter the dynamics of comparative
advantage and trade patterns, which the HOS model may not fully account for.
