International Trade Theory and Policy
by Steven M. Suranovic

Trade 70-2

Time and Factor Mobility

The degree of mobility of factors across industries is greatly affected by the passage of time. In the very very short run, say over a few weeks time, most unemployed factors are difficult to move to another industry. Even the worker whose skills are readily adaptable to a variety of industries would still have to take time to search for a new job. Alternatively, a worker in high demand in another industry might arrange for a brief vacation between jobs. This means that over the very short-run, almost all factors are relatively immobile.

As time passes the most readily mobile factors begin to find employment in other industries. At the closed textile plant, some of the managers, the accountants and some others may find new jobs within 4-6 months. The usable capital equipment may be sold to other firms. Looms in good working condition may be bought by other textile plants still operating. Trucks and other transport equipment will be bought by firms in other industries. As time progresses more and more factors find employment elsewhere.

But what about the seamstress near retirement whose skills are not in demand and who are unwilling to incur the cost of retraining. Or the capital equipment that is too old, too outdated, or just inapplicable elsewhere in the economy. These factors, too, can be moved to other industries given enough time. The older workers will eventually retire from the workforce. Their replacements will be their grandchildren who are unlikely to seek the skills or jobs of their grandparents.

Merely recall the decline of the family farms in America. For generations, children followed parents as farmers until it eventually became unprofitable to continue to operate the same way. As the number of farmers declined, the children of farmers began to move into the towns and cities. They went to colleges and often learned skills very different from their parents and grandparents.

In this way, as generations age and retire, the children acquire the new skills in demand in the modern economy, and the distribution of skills in the workforce changes. Labor automatically becomes mobile across industries if we allow enough time to pass.

Consider also the capital equipment that is unusable in any other industry. This capital is also mobile in a strange sort of way. Generally as capital equipment is used its value declines. Often the cost of repairs rises for a older machine. Older machines may be less productive than newer models also reducing their relative worth. When capital depreciates or loses its value sufficiently, a firm continuing to produce would likely invest in a new machine. Investment requires the owners of the firm to forgo profits in order to purchase new capital equipment.

Now suppose the firm is a textile plant and the owners are shutting it down. The capital equipment at the firm will suddenly depreciate more rapidly than originally anticipated. As this equipment depreciates though, new investments will not be directed at the same type of capital. Instead investors will purchase different types of capital that have the potential for profits in other industries. In this way, over time, as the current capital stock depreciates new investment is made in the types of capital needed for production in the future. With enough time, the capital stock is moved out of declining, unprofitable industries and into expanding, profitable industries.

In summary, virtually all factors are immobile across industries in the very short run. As time progresses, and at some cost of adjustment, factors become mobile across sectors of the economy. Some factors move more readily and at less cost than others. In the long run all factors are mobile at some cost. For workers, complete mobility may require the passing of a generation out of the workforce. For capital, complete mobility requires depreciation of the unproductive capital stock, followed by new investment in profitable capital.

International Trade Theory and Policy - Chapter 70-2: Last Updated on 9/16/99