Factor Mobility (5 minute read)


Learning Outcome:

After completing this lesson, you will understand the concept of factor mobility and how it relates to the time frame of a CGE analysis. 

Factor Mobility 

Factor mobility describes the ability of land, labor, capital and other factors to change where they are employed when there are changes in wage or rents across industries. Mechanics, for example, can move relatively easily from jobs in the auto industry to jobs in airplane maintenance if airlines offer higher wages. But capital equipment, such as construction machinery, is often difficult to repurpose from one application to another, despite changes in capital rents across industries.

Fully Mobile versus Sector-Specific Factors

Some CGE models, including the UNI-CGE model, offer a binary choice on the degree of factor mobility.  Factors can either move freely among industries or they cannot move at all from their current employment, and are "sector-specific."  

A decorative image of men and women of different professions standing together.When factors are fully mobile in a CGE model, they change their places of employment until wages and rents are equalized across production activities. For example, if workers can easily move between school employment and corporate training jobs, they will move to the activity in which pay is higher. If teachers start to move into corporate jobs, schools will increase their pay scales to try to retain teachers, and corporations may lower their pay because they have so many applicants.  Workers will be motivated to change jobs until school and corporate salaries are the same and there is no longer an incentive to change employment. 

The assumption of fully mobile factors provides a longer-term perspective on the outcome of model experiments.  Changing jobs or moving equipment to another industry can take time. The change may require a person to undertake specialized training, and capital equipment and machinery may need a large overhaul. Results from a CGE model that has an assumption that all factors are fully mobile therefore describes adjustment after a long time period of about 7 - 10 years (Table 1).  

Sector-specific factors are assumed to remain fixed in their original employment. This assumption can be applied to capital and land, but is not typically applied to labor. Models with sector-specific capital provide a short-term perspective of about 2-3 years, before factors have time to make a transition to new employment. Land is often treated as sector-specific in both the short and long term because it may be ill-suited to be planted in other crops. For example, land suited to cold-weather crops like wheat would not be productive if planted with tropical crops like bananas. 

Table 1. Factor mobility and time frame of analysis
Short-term: 2-3 years Medium-term: 5-7 years Long-term: 7-10 years
Labor Partially/fully Partially/fully Fully
Capital Sector-specific Partially/fully Fully

Partial Factor Mobility

Some CGE models, including the GTAP model, allow modelers to describe degrees of factor mobility. They use an elasticity parameter to define the percent change in the share of the workforce or capital stock that moves to a different production activity given a percent change in the ratio of the activity's wage or rent to the economy-wide average. One elasticity parameter is defined for each factor in the model. 

The assumption of partial factor mobility allows the model to represent a range of transition costs for each factor. The higher the factor mobility elasticity, the higher the costs and the longer the adjustment period described in model results.  

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Last modified: Thursday, 2 May 2024, 1:46 PM