Sluggish Intersectoral Factor Movements and Alternative Trade Policies

Abstract

One of the basic assumptions of the standard two-sector, two-factor general equilibrium model of production and trade is that factors are perfectly mobile between two sectors. If a policy-induced or policy-independent change in a parameter of the model leads to an inequality in the price of a factor as between two sectors, movement of the factor from the lower price sector to the higher price one will take place under the assumption of perfect mobility, and that will eventually eliminate the intersectoral difference in factor prices at the new equilibrium. This assumption of perfect mobility of factors has recently been a topic of further research in the two-sector production and trade literature. Questions have been raised about the validity of this assumption (see e.g., Mussa [5, 125-41], Yu [7, 387-93], Casas [2, 747-61], Yu and Parai [8, 601-09], and Parai and Yu [6, 842-52]). In the context of labor, it is argued that a policy-induced increase in the wage rate in one sector does not necessarily lead to a movement of enough labor from the other sector so as to re-establish the equality between sectoral wage rates even in the long run. Geographical or locational preferences of individuals for living in one area over another, serious attachments of workers to one region due to strong family ties, or high costs of moving from one place to another have usually been the reasons for the sluggish movement of labor from one sector to the other. On the other hand, the sluggishness in the mobility of physical capital is explained by the investors' attitude towards uncertainty in other sectors and also the high cost of moving and adjusting to the need of the new industry. Given this imperfect mobility, the net rental rates would not equalize between two sectors even in the long run. Mussa and Casas separately modeled the imperfect labor mobility problem, whereas Grossman [3, 1-17] modeled the case of imperfect capital mobility. Hill and Mendez [4, 19-25], however, developed a general model incorporating the imperfect mobility of both capital and labor in the two-sector general equilibrium model of production. Parai and Yu have used the both factors are imperfectly mobile. The purpose of the present paper is to extend the Parai-Yu analysis further to investigate the implications of imperfect factor mobility in the analysis of standard gains from trade issues in the literature. Specifically, we intend