This is “Domestic Factor Mobility”, section 4.2 from the book Policy and Theory of International Trade (v. 1.0).
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Domestic factor mobilityWhen productive factors like labor, capital, land, natural resources, and so on can be reallocated across sectors within a domestic economy. refers to the ease with which productive factors like labor, capital, land, natural resources, and so on can be reallocated across sectors within the domestic economy. Different degrees of mobility arise because there are different costs associated with moving factors between industries.
As an example of how the adjustment costs vary across factors as factors move between industries, consider 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. Fortunately for the accountant, she has skills that are used by all businesses. Although there may be certain specific accounting techniques associated with the textile industry, it is likely that this worker could find employment in a variety of industries. The worker would still suffer some adjustment costs such as a short-term reduction in salary, search costs to find another job, and 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 is 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 other 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 to college. All of this requires more time and incurs a greater cost.
Next consider the capital equipment used in the textile plant. The looms that are used to weave cloth are 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 relabeling the truck with the new company name. The truck is relatively costlessly transferable across industries.
Finally, consider the land on which the textile plant operates. 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 could be sold to another business that would recondition it to suit its 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 could 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.
These examples 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.
Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”