Chapter 9: Factor immobility

Question 1

What should the market system ensure (owing to perfect factor mobility)?

Answer 1

Full employment in all regions.

Question 2

What should the market do in terms of different regions?

Answer 2

It should eliminate all regional disparities and bring about an optimal allocation of resources.

Question 3

What assumptions does perfect factor mobility make?

Answer 3

There are many buyers and sellers, identical products, perfect information and freedom of entry.

Question 4

What does the market system assume that firms and individuals move in response to?

Answer 4

Wage signals alone.

Question 5

What factors inhibit the instantaneous movement of labour?

Answer 5

Skills mismatch, social ties, unemployment benefits, imperfect information, housing, negative equity and transaction costs.

Question 6

How does a skills mismatch inhibit the instantaneous movement of labour?

Answer 6

Individuals don’t always find it easy to move between occupations as they might not have the right skills for different jobs.

Question 7

What happened in the 1980s in the UK when the economy underwent significant structural change?

Answer 7

Many people lost jobs in manufacturing and were unable to transfer into the ascendant service sector because of a skills mismatch.

Question 8

What does occupational immobility result in?

Answer 8

Structural unemployment.

Question 9

How do social ties inhibit the instantaneous movement of labour?

Answer 9

The psychological costs of moving may outweigh the perceived benefits of gaining employment due to family and friends.

Question 10

How do unemployment benefits inhibit the instantaneous movement of labour?

Answer 10

High unemployment benefits reduce the incentive to find work and they distort wage signals.

Question 11

How does imperfect information inhibit the instantaneous movement of labour?

Answer 11

To find an appropriate job people must have access to information about all available opportunities.

Question 12

What increases the scope for movement and improves efficiency in terms of information?

Answer 12

Information about job vacancies can now be exchanged with much greater speed.

Question 13

How does housing inhibit the instantaneous movement of labour?

Answer 13

There are long waiting lists for local authority housing and prohibitively high house prices in the private sector.

Question 14

How does negative equity inhibit the instantaneous movement of labour?

Answer 14

Negative equity is when you buy something and find out that it is actually worth less than you thought but you can’t sell that product otherwise you would make a loss. This applies to housing.

Question 15

How do transaction costs inhibit the instantaneous movement of labour?

Answer 15

A disincentive for moving frequently is that individuals have to pay transactions costs.

Question 16

Give some examples of transactions costs.

Answer 16

Estate agent’s fees, solicitor’s fees, mortgage charges, removal expenses and stamp duty.

Question 17

What is stamp duty?

Answer 17

A tax paid on house purchase.

Question 18

What factors inhibit capital mobility?

Answer 18

Proximity to the market, industrial inertia and external economies on scale.

Question 19

How does proximity to the market inhibit capital mobility?

Answer 19

Although firms may be tempted to move to a place where there are lower labour costs, they might want to stay close to their market and may not be willing to incur higher transport costs.

Question 20

How does industrial inertia inhibit capital mobility?

Answer 20

If an industry evolved in a particular region, there may be a historical inertia which prevents it from uprooting instantaneously.

Question 21

How do external economies on scale inhibit capital mobility?

Answer 21

A firm that is geographically isolated cannot share in the cost advantages available to firms that cluster together.

Question 22

What are the advantages that firms that cluster together can share?

Answer 22

Cheaper raw materials, easier recruitment, shared advertising, shared research and better facilities.

Question 23

Mobility is lowest among what type of workers?

Answer 23

Manual workers

Question 24

What should firms seeking to exploit lower wages lead to?

Answer 24

It should bring about more work to the workers.

Question 25

What does the immobility of labour mean?

Answer 25

It means that the economy will not always operate at the potential output, unemployment will persist in some regions and some employers will experience recruitment difficulties.

Question 26

What are some examples of costs an individual may experience as a result of factor mobility?

Answer 26

Transactions costs and psychological costs.

Question 27

What are some examples of social costs that are the result of factor mobility?

Answer 27

Social costs occur when excessive movement towards one area results in excess demand for social capital.

Question 28

What are some examples of social capital?

Answer 28

Schools, hospitals and infrastructure.

Question 29

Why is excess demand for social capital a problem?

Answer 29

It can lead to congestion and environmental problems.

Question 30

What is another effect of excess demand for social capital in terms of the places that people are leaving?

Answer 30

There will be a less than optimal use of social capital in the regions from which people have migrated.

Question 31

How can the government correct the market failure of regional differences?

Answer 31

It can increase the rate of home building, remove stamp duty, increase information about the availability of jobs, reduce unemployment benefits, promote locally negotiated wage settlements, increase training, provide grants and employment subsidies, improve infrastructure and use planning regulation.

Question 32

How can increasing the rate of home building solve the regional problem?

Answer 32

It can prevent property prices becoming prohibitive in popular areas.

Question 33

How can removing stamp duty solve the regional problem?

Answer 33

It diminishes the size of transactions costs incurred when moving.

Question 34

How can reducing unemployment benefits solve the regional problem?

Answer 34

It provides a larger incentive for people to find work.

Question 35

How can promoting locally negotiated wage settlements solve the regional problem?

Answer 35

It reflects the labour scarcities of different regions.

Question 36

How can increasing training solve the regional problem?

Answer 36

It reduces the occupational immobility and decreases structural unemployment.

Question 37

How can providing grants and subsidies solve the regional problem?

Answer 37

It increases employment in deprived regions.

Question 38

How can improving infrastructure solve the regional problem?

Answer 38

It allows easier access to poorer regions.

Question 39

How can using planning regulation solve the regional problem?

Answer 39

It encourages or dissuades firms from locating in different areas.