Flashcards in Chapter 9: Factor immobility Deck (39):
What should the market system ensure (owing to perfect factor mobility)?
Full employment in all regions.
What should the market do in terms of different regions?
It should eliminate all regional disparities and bring about an optimal allocation of resources.
What assumptions does perfect factor mobility make?
There are many buyers and sellers, identical products, perfect information and freedom of entry.
What does the market system assume that firms and individuals move in response to?
Wage signals alone.
What factors inhibit the instantaneous movement of labour?
Skills mismatch, social ties, unemployment benefits, imperfect information, housing, negative equity and transaction costs.
How does a skills mismatch inhibit the instantaneous movement of labour?
Individuals don't always find it easy to move between occupations as they might not have the right skills for different jobs.
What happened in the 1980s in the UK when the economy underwent significant structural change?
Many people lost jobs in manufacturing and were unable to transfer into the ascendant service sector because of a skills mismatch.
What does occupational immobility result in?
How do social ties inhibit the instantaneous movement of labour?
The psychological costs of moving may outweigh the perceived benefits of gaining employment due to family and friends.
How do unemployment benefits inhibit the instantaneous movement of labour?
High unemployment benefits reduce the incentive to find work and they distort wage signals.
How does imperfect information inhibit the instantaneous movement of labour?
To find an appropriate job people must have access to information about all available opportunities.
What increases the scope for movement and improves efficiency in terms of information?
Information about job vacancies can now be exchanged with much greater speed.
How does housing inhibit the instantaneous movement of labour?
There are long waiting lists for local authority housing and prohibitively high house prices in the private sector.
How does negative equity inhibit the instantaneous movement of labour?
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.
How do transaction costs inhibit the instantaneous movement of labour?
A disincentive for moving frequently is that individuals have to pay transactions costs.
Give some examples of transactions costs.
Estate agent's fees, solicitor's fees, mortgage charges, removal expenses and stamp duty.
What is stamp duty?
A tax paid on house purchase.
What factors inhibit capital mobility?
Proximity to the market, industrial inertia and external economies on scale.
How does proximity to the market inhibit capital mobility?
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.
How does industrial inertia inhibit capital mobility?
If an industry evolved in a particular region, there may be a historical inertia which prevents it from uprooting instantaneously.
How do external economies on scale inhibit capital mobility?
A firm that is geographically isolated cannot share in the cost advantages available to firms that cluster together.
What are the advantages that firms that cluster together can share?
Cheaper raw materials, easier recruitment, shared advertising, shared research and better facilities.
Mobility is lowest among what type of workers?
What should firms seeking to exploit lower wages lead to?
It should bring about more work to the workers.
What does the immobility of labour mean?
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.
What are some examples of costs an individual may experience as a result of factor mobility?
Transactions costs and psychological costs.
What are some examples of social costs that are the result of factor mobility?
Social costs occur when excessive movement towards one area results in excess demand for social capital.
What are some examples of social capital?
Schools, hospitals and infrastructure.
Why is excess demand for social capital a problem?
It can lead to congestion and environmental problems.
What is another effect of excess demand for social capital in terms of the places that people are leaving?
There will be a less than optimal use of social capital in the regions from which people have migrated.
How can the government correct the market failure of regional differences?
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.
How can increasing the rate of home building solve the regional problem?
It can prevent property prices becoming prohibitive in popular areas.
How can removing stamp duty solve the regional problem?
It diminishes the size of transactions costs incurred when moving.
How can reducing unemployment benefits solve the regional problem?
It provides a larger incentive for people to find work.
How can promoting locally negotiated wage settlements solve the regional problem?
It reflects the labour scarcities of different regions.
How can increasing training solve the regional problem?
It reduces the occupational immobility and decreases structural unemployment.
How can providing grants and subsidies solve the regional problem?
It increases employment in deprived regions.
How can improving infrastructure solve the regional problem?
It allows easier access to poorer regions.