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Econoception 2014

Econoception Issue 32: 31st August 2014

Table of Contents

1. Factor immobility
2. Econoception Challenge

FACTOR IMMOBILITY
1. Fluid dynamics
http://www.economist.com/news/finance-and-economics/21614159-americas-famously-flexible-labour-marketbecoming-less-so-fluid-dynamics

The Economist Aug 30th 2014 Print Edition

Content from H2 Economics being applied:

Factor Immobility
Unemployment

Fluidity?
The paper cited in the article coins a term fluidity for the movement in
and out of jobs. They then use this measure to conclude (after a series of
statistical tests) that a 1% fall in the turnover of workers, ceteris paribus,
reduces the proportion of men under 25 without a high school diploma in
work by 1.4%. This seems to paint a picture that fluidity is good and
economies should strive to increase their labour market turnover rate.
I disagree. As stated in the article, economists from Princeton University
had noted several contradictions along that line of reasoning: when
turnover fell from early 1980s to mid 2000s, employment increased; when
turnover fell during the late 1990s, productivity jumped. Taking into
account these evidences, the fall in fluidity may also suggest that workers
are finding better fits in the jobs market over time. Increased longevity of
jobs can lead to workers becoming more skilled and more productive.

Factor Immobility
But we will put this issue aside for a moment and look at the problem
from another perspective: market failure.



The spread of occupational licensing, for everything from horse massage to
hair braiding, has raised barriers to entry for occupations that once required
little or no training.
Immobility of factors of production should spring to mind. Heres how I
like to explain it with a simple PPC diagram.

Case 1: Look at PPC 1. Suppose now that point A is both productive and
allocative efficient. The economy is producing at point A. In the next
period, consumers tastes and preferences change and point C is the new
allocative efficient point. Because resources in the economy are immobile,
production cannot be reorganised to move from point A to point C.

Case 2: Suppose now that the economy improves its level of technology
and now it can potentially produce on PPC 2. (Potential Growth). However,



in actual fact its still producing at point A. The new allocative and
productive efficient point is at point B. The economy is unable to take
advantage of the potential growth and translate it into actual growth
because of immobility of factors of production.

In both cases, we see that allocative efficiency is not achieved. Thats it for
the explanation. Do feel free to email me if you have any questions
regarding this. I promise I will reply!

ECONOCEPTION CHALLENGE
1. Watching the wages Germanys economy
http://www.economist.com/news/europe/21614178-germanys-economy-stutters-even-if-fundamentals-are-strongwatching-wages

The Economist August 30th 2014 Print Edition

Visit: http://econoception.org/2014/08/31/challenge