Question

John is a low skilled worker, working in a high skill intensive industry. He lives in a country that is relatively abundant in high skilled labor. For skilled workers changing jobs is costless, for low skilled workers, however, a certain amount of time is necessary to learn a new job. Assume there is no unemployment. If this country opens up to trade, what will be the effect on John’s income in the short run? What will it be in the long run? Why is this true?

HINT: Think of low skilled and high skilled labor as two separate factors of production.

Answer 1

The Heckscher Ohlin model says that trade will always occur when a country exports that commodity that intensively uses its most abundant factor in production. Thus in this case as John is unskilled, when trade opens up then the country will export that commodity which uses skilled labour intensively as that is the most abundant factor of production. The employment of skilled labour will thus increase. John, as he is unskilled will experience a fall in income in the short run. In the long run, John can acquire the skills necessary and become a part of the skilled workforce himself. His income will then increase in the long run as the product using the skilled workers increases. This is true as per the Heckscher Ohlin model which emphasises the employment of the more abundant factor in the production of the exported good.