Globalization of Labor Markets and Inequality

In thinking about the impact of the globalization of labor markets on inequal-ity, economists naturally turn to the Hecksher-Ohlin model. While in many contexts the effects of trade and migration can presumably be well understood through this model, in other contexts it may be less appropriate. I argue below that considering models other than the Hecksher-Ohlin model may suggest very different implications regarding the effects of the globalization of labor mar-kets on inequality. I first discuss Kremer and Maskin, which looked at the impact of trade on inequality in poor countries, and then discuss Kremer and Watt, which examines the impact of immigration on inequality in rich countries.1 Trade Consider a standard Hecksher-Ohlin model with two complementary fac-tors of production: skilled labor and unskilled labor. Suppose there is a rich country with a high ratio of skilled to unskilled labor and a poor country with a low ratio of skilled to unskilled labor. Under the Hecksher-Ohlin model, allow-ing trade will equalize factor prices, and therefore skilled wages will rise in the rich country and fall in the poor country. Unskilled wages will fall in the rich country and rise in the poor country. This result of trade increasing inequality in the rich country resonates with many in the United States and in Europe. However, the model also implies that trade will decrease inequality in the poor country. Many, however, are not convinced that this implication of the model is consistent with the experience of poor countries. People opposed to