Factor Immobility (Labour Markets)

One cause of market failure is the immobility of factors of production. There are two main types of factor immobility, occupational and geographical immobility.

Occupational Immobility

• Occupational immobility occurs when there are barriers to the mobility of factors of production between different sectors of the economy leading to these factors remaining unemployed, or being used in ways that are not efficient.

• Some capital inputs are occupationally mobile – a computer can be put to use in many different industries. And commercial buildings such as shops and offices can be altered to provide a base for many businesses. However some units of capital are specific to the industry they have been designed for – a printing press or a nuclear power station for example!

• People often experience occupational immobility. For example, workers made redundant in the steel industry or in heavy engineering may find it difficult to find a new job. They may have specific skills that are not necessarily needed in growing industries which causes a mismatch between the skills on offer from the unemployed and those required by employers looking for workers. This problem is called structural unemployment. Clearly this leads to a waste of scarce resources and represents market failure.

Geographical Immobility

Geographical immobility refers to barriers people moving from one area to another to find work. There are good reasons why geographical immobility might exist:

• Family and social ties
• The financial costs involved in moving home including the costs of selling a house and removal expenses.
• Huge regional variations in house prices leading to a shortage of affordable housing in many areas
• The high cost of renting property
• Differences in the general cost of living between regions and also between countries
• Migration controls e.g. a cap on inward migration
• Cultural and language barriers

Policies to Improve the Mobility of Labour

To reduce occupational immobility:

• Invest in training schemes for the unemployed to boost their human capital to equip them with new skills and skills that can be transferred from one occupation to another.
• Subsidise the provision of vocational training by private sector firms to raise the skills level

To reduce geographical immobility:

• Reforms to the housing market designed to improve the supply and reduce the price of rented properties and to increase the supply of affordable properties.
• Specific subsidies for people moving into areas where there are shortages of labour – for example teachers and workers in the National Health Services