market failure - factor immobility

factor immobility

factor immobility: the inability of a factor of production to shift from one use to another and can result in the price mechanism no longer efficiently allocating resources to maximise society’s welfare.

• constrains the amount and types of factors of production that producers can utilise when making production decisions

occupational immobility → definition

occupational immobility: the inability of factors of production to move from one occupation or sector to another

occupational immobility

• labour often experiences occupational immobility due to the mismatch of skills between the unemployed workers and those required by the jobs ⇒ labour being unemployed or used inefficiently

  • there could be technological advancements or changes in the structure of the economy leading to an increase in demand for the skills in new and growing industries and a decrease in demand for the skills in declining industries

  • the workers in the declining industries may lack the relevant skills or education to take on jobs in the expanding industries

    • for instance, workers retrenched from the declining (sunset) textile industry may have job-specific skills that are not necessarily transferrable to expanding (sunrise) pharmaceutical industries

  • structural unemployment arises ⇒ caused by workers who are retrenched from declining industries/regions being unable or unwilling to take on new jobs that are available in expanding industries/regions

• lack of information on jobs available ⇒ occupational immobility

  • workers can make good choices about what jobs to apply for and what training to embark on only if they are aware of the jobs available

  • due to imperfect information, they may be unsure or unaware of the jobs available and thus remain in their existing jobs, which may not be a good fit for their skills

  • some may have made poor decisions regarding their university courses and, upon graduation, found themselves with skillsets that gave them very limited career options

geographical immobility → definition

geographical immobility occurs due to the inability or lack of willingness of factors of production to move from one geographical area to another

• e.g. when a large firm or an industry moves its physical location from one region to another, there would be a fall in demand for labour in one region and an increase in demand for labour in the region where it relocated to

geographical immobility

• geographical immobility when workers are unable or unwilling to move to the expanding regions with greater and/or better job opportunities

  • rural workers cannot take up jobs in the city because they are not matched up geographically ⇒ inefficient allocation of resources

• geographical immobility tends to exist in large countries such as the UK, the USA, China and India where there are barriers to people moving from one region to another, in response to changes in the labour market ⇒ countries where there are rural and urban areas

  • these barriers include social costs (e.g. family and social ties) and financial costs (e.g. high relocation costs, regional
    differences in house prices and costs of living) → consider various perspectives, weigh the costs against the benefits and only relocate if benefits > costs

how does factor immobility leads to market failure

• factor immobility leads to market failure as the price mechanism can no longer efficiently allocate resources to maximise society’s welfare ⇒ impedes the allocative function of price

• when factors of production are immobile, producers are not able to re-allocate factors of production to produce the quantity and
  type of goods and services that generate the most utility for consumers

• society’s welfare is not maximised as the optimal amount of the right good or service is not produced, resulting in allocative inefficiency

government intervention for occupational immobility

• invest in increased provision of training schemes for its labour force

  • can be done through subsidising the provision of vocational training by private sector firms to raise the skills level of their employees, or by subsidising workers who
    attend such courses OR increase provision of skills-related courses directly

  • investment in training helps to boost the human capital of employees to give them new skills and skills that can be transferred from one occupation to another

  • if such training is successful, there will be reduced occupational
    immobility and the labour market can become more flexible in responding to changes in market conditions ⇒ especially important for the unemployed, particularly for workers experiencing structural unemployment

• the government can set up agencies to facilitate information sharing on jobs available in the various industries with institutes of higher learning, or via job portals to facilitate job matching

  • as the information on available jobs becomes more accessible, jobseekers will be able to find jobs that better fit their skillsets and profile and reduce unemployment due to factor immobility

• the government can work with institutes of higher education (vocational institutes, polytechnics and universities) to ensure alignment between the courses provided and the changing needs of the economy

  • e.g. if the aerospace industry is expanding, the government could encourage these institutes of higher education to start aerospace engineering courses and ensure that there are workers trained for the growing industry

examples of training schemes in singapore → occupational immobility

1. the Adapt and Grow initiative

   • the Workforce Singapore (WSG) introduced the Adapt and Grow initiative targeted at two groups ‒ Professionals, Managers, Executives and Technicians (PMETs) and Rank and File (RnF) workers

   • Singaporean workers who are affected by the economic slowdown and restructuring can be placed under largely subsidised programmes to re-skill themselves, to obtain
     the necessary knowledge and competencies to take on new jobs in different sectors

2. SkillsFuture

   • a national movement to encourage Singaporeans to continuously develop their skills so as to achieve their fullest potential throughout life

   • the SkillsFuture credit, where Singaporeans aged 25 and above receive an opening credit of $500, would be an example of a subsidy which encourages Singaporeans to sign up for courses in order to further hone their skills or develop new areas of interest

   • the government hopes that by picking up new skills, Singaporeans who are seeking jobs could overcome
     occupational immobility and secure jobs in the growth sectors of the economy

limitations for govt intervention → occupational immobility

• time lag

  • the time taken for retraining and skills upgrading is long ⇒ effects also take a long time to surface

  • immobility continues to persist

• high expenditure → unsustainability

  • the government would need to spend a significant amount of its budget to provide subsidies to employers and/or employees to encourage the take-up of such programmes

    • this spending is likely to be more than just a one-off occurrence as the training of skills require time and training would be needed for different batches of employees

• receptivity of workers

  • the effectiveness of the policies depends on the
    willingness of the workers to continue acquiring new skills

  • workers may be resistant to change, causing them to remain unwilling to pick up new skills or move out of their
    comfort zones, thus limiting the effectiveness of the policies

    • costs may have to be incurred to conduct advertising or educational campaigns to change the mindsets of these workers

  • the effectiveness of training depends on the ability of workers to learn the new skills ⇒ may be ineffective especially if the unemployed workers are unskilled and the skills to acquire are too difficult

    • e.g. workers with only primary school education may find it very challenging to learn programming to join the IT industry

unintended consequences of govt intervention → occupational immobility

• (+ve) training could result in an improvement in the quality of labour (human capital) which will raise productivity, increasing output produced per worker ⇒ increased labour productivity results in potential growth in the economy, which could lead to higher material standard of living in the future

• (-ve) with imperfect information, the students may be learning skills for an industry that may not eventually develop successfully in an economy

  • requires much foresight on the government's part to ensure positive returns to the investment in these identified skillsets

• (-ve) opportunity cost is incurred (e.g. improving healthcare or education)

  • eithout prudence, the government budget could face a strain, and if a high level of government debt accumulates, more problems could be created in the future

government intervention for geographical immobility

• subsidise workers who move into areas where there are labour shortages through relocation grants → reduces the cost of relocation by compensating workers for uprooting themselves and their family ⇒ workers would be more inclined to accept job offers in the cities

  • provide subsidised rental housing in the major cities for workers

  • the government can impose cooling measures in the housing market to reduce rental and housing prices by lowering the demand for housing in cities ⇒ could be in the form of higher interest rates or higher down payment requirements for residential purchases

• develop transport infrastructure such as expanding transport networks both within the city and across cities

  • e.g. roads, expressways, railway lines, air and sea routes

  • allows workers to travel within the city and between cities for work more easily and quickly

• the government can facilitate the creation of jobs and job portals, which enable job matching to allow the spouses of those relocating to find jobs in the new cities more easily + relax immigration controls and issue work permits to the spouses of workers who are relocating into the cities

  • would make workers more inclined to accept job offers in the cities

• since english is the international medium of communication, one policy governments can employ is to adopt English as a second language in the education system, and ensure all street signs have equivalent English translations

  • applies to locations where the medium of communication may be a factor in the geographical immobility of factors of production

  • makes such cities more accessible to international workers

  • the government can provide subsidised language classes so that foreign workers can learn the local language at a lower cost

examples of developing transport infrastructure

• Guangzhou - Shenzhen - Hong Kong Express Rail Link

  • has helped to reduce travelling time between the two cities from 2 hours to about 48 minutes

  • the high-speed train began operation on 2018 and would allow workers to travel more easily between the 2 cities

  • helps to reduce geographical immobility within the region, where different cities might be nodes for different industries

limitations of govt intervention → geographical immobility

• time lag

  • the time taken for infrastructural and housing development is long ⇒ effects also take a long time to surface

  • immobility continues to persist

• high expenditure → unsustainability

  • the government would need to spend a significant amount of its budget to provide subsidies for housing

  • infrastructural development is also a very costly affair since the purchase of capital goods would require large amount of spending

• receptivity of workers

  • the effectiveness of the policies depends on the willingness of the workers to relocate to meet up with the needs of the ever-changing economy

  • workers may be resistant to change, causing them to remain unwilling to pick up new skills or move out of their
    comfort zones, thus limiting the effectiveness of the policies

    • costs may have to be incurred to conduct advertising or educational campaigns to change the mindsets of these workers

unintended consequences of govt intervention → geographical immobility

• distorts the working of the price mechanism as they influence demand and supply ⇒ greater inefficiencies in the market

  • e.g. many local residents may be unwilling to relocate or hold back on selling their existing homes for fears of not being able to purchase a new house

  • e.g. there may be much speculation by developers and real estate professionals about slowing activity in the housing market, leading to fewer construction projects in the country