Factor Price Equalization

Factor Price Equalization:

While some of these differences may persist over long periods of time, economists predict that factor prices for different occupations requiring the same skills and in different geographical locations will tend to equalize over time. If wages decline for one occupation or in one location relative to wages elsewhere workers will move to other jobs in other locations and firms will move or hire different mixes of workers in order to utilize the lower-wage workers. The decrease in supply and the increase in demand will tend to raise wages in the previously low-wage occupations and locations. In the higher-wage occupations and locations on the other hand, the influx of workers and the exit of firms will tend to lower equilibrium wages. Any wage differentials that persist in the long run will reflect the marginal value to the lower-paid workers of the quality of life in their communities, the marginal non-pecuniary benefits associated with their occupations and the marginal value of any remaining skill differentials.

This theory of factor price equalization elucidates why U.S. workers want to keep the Mexican border closed and also why they resent the movement of U.S firms to Mexico. Low wages in Mexico relation to those in U.S. are currently cheering hundreds of thousands of Mexico workers to cross the border illegally. These similar low wages are also encouraging U.S. manufacturers of a wide variety of different products to build plants just over the Mexican border. Both of these changes can merely serve to reduce the equilibrium wages for U.S. workers at the same time that they raise the equilibrium wages for workers remaining in Mexico. The supply of labour is rising in U.S. and decreasing in Mexico, while the demand for labour is increasing in Mexico and decreasing in U.S.

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