AS Market Failure

Factor Immobility

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

Immobility of labour – a cause of unemployment and market failure

Job centre

One of the main causes of long term unemployment is that workers lack the skills required by expanding industries in the economy.

Occupational Immobility

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

Some capital inputs are occupationally mobile – a computer can be put to use in many different industries. Commercial buildings 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.

Labour often experiences occupational immobility. For example, workers made redundant in the sheet metal industry or in heavy engineering may find it difficult to gain re-employment. They may have job-specific skills that are not necessarily needed in growing industries. This implies that there is a mismatch between the skills on offer from the unemployed and those required by employers looking for extra workers. This is also called structural unemployment and explains why there is a core of workers in the UK who find it difficult to find paid work. Clearly this leads to a waste of scarce resources and represents market failure.

Geographical Immobility

People may also experience geographical immobility – meaning that there are barriers to them moving from one area to another to find work. There are good reasons why geographical immobility might exist:

Family and other social ties.
The financial costs involved in moving home including the costs of selling a house, removal expenses and other associated expenditure.
Huge regional variations in house prices.
Differences in the general cost of living between regions.

The regional divide in house prices is a major contributor to geographical immobility. The widening gap in average prices and associated problems of housing affordability can make it virtually impossible for people from the North to consider moving south because they cannot afford to maintain their standard of living in the South East.

Policies to Improve the Mobility of Labour

To reduce occupational immobility the government might:

Invest in increased provision of training schemes for the unemployed – particularly those workers experiencing structural unemployment. Investment in the training of the labour force is designed 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, then the labour market can become more flexible in response to changes in labour demand and labour supply
Subsidise the provision of industrial training by private sector firms to raise the skills level
Raise total spending on education and move towards increased investment in vocational training for students

To reduce geographical immobility:

Reforms to the housing market designed to improve the supply and reduce the cost 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

Author: Geoff Riley, Eton College, September 2006

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AS Market Failure

Factor Immobility

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