International Trade Theory and Policy
by Steven M. Suranovic

Trade 70-1

Domestic Factor Mobility

Domestic factor mobility refers to the ease with which productive factors, like labor, capital, land, natural resources, etc, can be reallocated across sectors within the domestic economy. Different degrees of mobility arise because there are different costs associated with moving factors across industries.

An example of how the adjustment costs vary across factors as factors move across industries is provided by considering a hypothetical textile firm that is going out of business.

The textile firm employs a variety of workers with different types of specialized skills. One of these workers is an accountant. An accountant has skills that are used by all businesses. Although there may certain specific accounting techniques associated with the textile industry, it is likely that this worker could find employment in a variety of different industries. The worker would still suffer some adjustment costs such as a short-term reduction in salary, search costs to find another job as well as the anxiety associated with job loss. However, assuming there is no glut of accountants in the economy this worker is likely to be fairly mobile.

Consider another worker who was employed as a seamstress in the textile firm. If the textile industry as a whole is downsizing then it is unlikely that she will find a job in another textile plant. Also, the skills of a seamstress are not widely used in very many industries. For this worker finding another job may be very difficult. It may require costs beyond those incurred by the accountant. This worker may decide to learn a new profession by attending a vocational school or going on to college. All of this requires more time and incurs a greater cost.

Next consider the capital equipment used in the textile plant. The loom that is used to weave cloth is unlikely to be very useful or productive in any other industry. Remaining textile firms might purchase them but only if the prices are very low. Ultimately these machines are likely to fall into disuse and be discarded. Looms exhibit very low mobility to other industries.

However, consider a light truck owned and operated by the firm. This truck could easily be sold and used by another firm in a completely different industry. The only costs would be the cost of making the sale (advertisements, sales contracts, etc.) and perhaps the cost of re-labeling the truck with the new company name. The truck is relatively costlessly transferable across industries.

Finally consider the land on which the textile plant has operated. Depending on the location of the firm and the degree of new business creations or expansions in the area, the land may or may not be transferred easily. One possible outcome is that the property is sold to another business who will recondition it to suit their needs. In this case, the cost of mobility includes the transactions costs to complete the sale, plus the renovation costs to fix up the property for its new use. Alternatively the land may remain for sale for a very long time during which the plant merely becomes an eyesore. In this case the land's immobility may last for years.

The examples above suggest that the cost of factor mobility varies widely across factors of production. Some factors such as accountants and trucks may be relatively costless to move. Other factors like looms and seamstresses may be very costly to move. Some factors like land may be easy to move in some instances but not in others.

International Trade Theory and Policy - Chapter 70-1: Last Updated on 9/16/99

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