International Trade Theory and Policy
by Steven M. Suranovic

Trade 70-0

Factor Mobility and Trade - Overview

Factor mobility refers to the ability to move factors of production - labor, capital or land - out of one production process into another. Factor mobility may involve the movement of factors between firms within an industry, as when one steel plant closes but sells its production equipment to another steel firm. Mobility may involve the movement of factors across industries within a country, as when a worker leaves employment at a textile firm and begins work at a automobile factory. Finally mobility may involve the movement of factors between countries either within industries or across industries, as when a farm worker migrates to another country or when a factory is moved abroad.

The standard assumptions in the literature are that factors of production are freely (i.e., without obstruction) and costlessly mobile between firms within an industry and between industries within a country, but are immobile between countries.

The rationale for the first assumption, that factors are freely mobile within an industry, is perhaps closest to reality. The skills acquired by workers and the productivity of capital are likely to be very similar across firms producing identical or closely substitutable products. Although there would likely be some transition costs incurred, such as search, transportation and transaction costs, it remains reasonable to assume for simplicity that the transfer is costless. As a result this assumption is rarely relaxed.

The assumption that factors are easily movable across industries within a country is probably unrealistic, especially in the short-run. Indeed this assumption has been a standard source of criticism for traditional trade models. In the Ricardian and Heckscher-Ohlin models, factors are assumed to be homogeneous and freely and costlessly mobile between industries. When changes occur in the economy requiring the expansion of one industry and a contraction of another, it just happens. There are no search, transportation or transaction costs. There is no unemployment of resources. Also, since the factors are assumed to be homogeneous, once transferred to a completely different industry, they immediately become just as productive as the factors that had originally been employed in that industry. Clearly, these conditions cannot be expected to hold in very many realistic situations. For some, this inconsistency is enough to cast doubt on all of the propositions that result from these theories.

It is important to note, however, that trade theory has attempted to deal with this concern to some extent. The immobile factor and the specific factor models represent attempts to incorporate factor immobility precisely because of the concerns listed above. Although these models do not introduce resource transition in a complicated way, they do demonstrate important income redistribution results and allow one to infer the likely effects of more complex adjustment processes by piecing together the results of several models. (See Chapter 100-3, especially).

The final issue of mobility involves the mobility of factors between countries. In most international trade models, factors are assumed to be immobile across borders. Traditionally, most workers remain in their country of national origin due to immigration restrictions while capital controls have in some periods restricted international movements of capital. When international factor mobility is not possible, trade models demonstrate how national gains can arise through trade in goods and services.

Of course, international mobility can and does happen to varying degrees. Workers migrate across borders, sometimes in violation of immigration laws, while capital flows readily across borders in today's markets. The implications of international factor mobility has been addressed in the context of some trade models. A classic result by Mundell (1957) demonstrates that international factor mobility can act as a substitute for international trade in goods and services.

International Trade Theory and Policy - Chapter 70-0: Last Updated on 9/16/99