Dr. K. Murugan Assistant Professor Department of Economics Guru Nanak College Chennai-42.

1. Factor Pricing and
Labour Migration
by
K. Murugan
Assistant Professor
Dept. of Economics
Guru Nanak College
Chennai-42.

2. Factor Pricing in Competitive Market
Factor pricing is similar to commodity
pricing i.e. demand=supply
Inputs used in production is known as
factors of production
Land, labor and capital are the factors that
are purchased and sold in the market
For the simplicity we explain market for
labor. However the theory is for all
“productive factor”

3. Demand for Labor
Assumptions
A single commodity, is produced. Price of X is
PX.
Goal of the firm is profit maximisation.
Labor market is perfectly competitive. Hence
in the given wage rate (w) market supply curve
is horizontal.
Production function is increasing at decreasing
rate i.e. marginal product of labor is declining.

4. A firm will hire a labor up to the point at
which the last unit contributes as much as to
total cost as to total revenue.
Contribution by last unit of labor
In Revenue=PX*MPL=VMPL
In Cost= Wage (w)
 For equilibrium VMPL=w

5.  Factor-proportions theory
 Countries have different endowments of factors of
production some are capital-abundant (high K/L)
some are labor-abundant (low K/L) Different
industries have different requirements for K and L
some are capital-intensive some are labor-intensive
 Machine production is capital-intensive in both U.S.
and India K/L = 2 Cloth production is labor-intensive
in both U.S. and India K/L = 0.5U.S. is capital-
abundant and therefore has a comparative advantage
in machine production India is labor-abundant and
therefore has a comparative advantage in cloth
production

6.  Perfect mobility is assumed
Labor can move from cloth production to machine
production with no delay and no retraining Capital
equipment can move from cloth production to
machine production with no delay and no
modifications The other extreme would be perfect
specificity: cloth laborers or cloth machines useless
for machine production and vice versa
• No trade yet Machine industry is capital-intensive:
K/L=2
Cloth industry is labor-intensive: K/L=0.5

7.  Trade opens Machine industry wants to expand due to
new foreign demand
 Cloth industry must contract due to foreign
competition
 Industries adjust to new market
Machine industry can use all the freed-up K but not
all the L Cloth industry is half its former sizeSome
workers are now unemployed.
 There is now a surplus of labor and a shortage of
capital: The labor surplus is (theoretically) cured by a
fall in wages, which motivates reduced labor market
participation.

8.  The capital shortage is cured by a rise in rents, which
motivates more saving and investment. Bottom line:
opening of trade has reduced the income of the scarce
factor of production (labor) while increasing the
income of the abundant factor of production (capital)
Stolper-Samuelson “theorem”
 Further consequences
 The rise in rents and fall in wages motivates both
industries to reduce their K/L ratios.The opposite will
happen in India. The shift in production will lead to a
surplus of capital and a shortage of labor.
Consequence: falling rents, rising wages. K/L will
rise in India.

9.  Generalizing: trade will tend to equalize K/L ratios in
the two countries. Each country’s industrial structure
will shift U.S. moves away from cloth toward
machines; India vice versa
 Labor unions will not tolerate falling wages.
But absolute wages will not likely fall. Increasing
labor productivity leads to higher wages which tend
to mask fall in wages due to shifted industrial
structure.

10.  Labor mobility, capital mobility
We have assumed perfectly mobile labor- all workers
in the cloth industry can instantly relocate to the
machine industry with no delay and no loss of
productivity. Also perfectly mobile capital – all
machines formerly used in the cloth industry are
equally useful in the machine industry.
 If capital were perfectly specific
Suppose equipment used in the cloth industry were
useless for machine production, and equipment used
for machine production were useless for cloth
production. If workers retain perfect mobility they
will have an advantage that leads to higher wages.

11. Migration-the temporary or permanent movement
of people from one place to another.
Forms of Migration
Forced migration includes refugees, asylum
seekers and people forced to move due to external
factors
Family members - people sharing family ties
joining people who have already entered an
immigration country
Return migrants - people who return to their
countries of origin after a period in another
country

12. Types of Migration
Legal migrants
Illegal migrants
Irregular migrants
Refugees
Labour migration
Legal Migrants: Migrants that legally enter
into the country, have a valid immigrant visa
and proper documentation.

13. Illegal migrant: A person who, owing to illegal
entry or the expiry of his or her visa, lacks legal
status in a transit or host country. The term
applies to migrants who infringe a country’s
admission rules and any other person not
authorized to remain in the host country
Irregular Migration
The people who enter or remain in a country of
which they are not a citizen in breach of national
laws.
The IMO estimates that irregular immigrants
account for one-third to one-half of new entrants
into developed countries, marking an increase of
20 per cent over the past ten years.

14. Labour Migration
An international migrant worker is defined by
the 1990 United Nations (UN) International
Convention on the Protection of the Rights of
All Migrant Workers and Members of their
Families as “a person who is to be engaged, is
engaged or has been engaged in remunerated
activity in a State of which he or she is not a
national.

15. Types of Labour Migration
Temporary labour migrants (also known as guest
workers or overseas contract workers):
People who migrate for a limited period of time in
order to take up employment and send money
home.
Highly skilled and business migrants: People with
qualifications as managers, executives,
professionals, technicians or similar, who move
within the internal labour markets of transnational
corporations and international organizations, or who
seek employment through international labour
markets for scarce skills.

16. Many countries welcome such migrants and
have special 'skilled and business migration'
programs to encourage them to come.
Labour:
A voluntary form of migration. Eg skilled
international migration to global cities like
London or Dubai.
Rural –Urban:
Both forced and voluntary migration
predominantly in developing nations. But also
in developed nations with drought in Australia.

17.  Voluntary: It occurred as territorial expansion
(colonisers). Now occurs for economic
(employment)/social (to join family or
communities)/better climate.
 Involuntary: All forms of push factors resulting in
refugees.
 Asylum Seeker: A person who has a right to work and
live in a country for a short time.
 Refugee: A person who has left their home in a
country where they feel unsafe because of persecution
or war, and has applied to stay in another country
where they feel safe. If they are allowed to stay they
become a refugee.

18. Internal:
Simply refers to rural urban migration/ push
and pull factors at work within a nation.
This is migration within a country. explain
what the following types of internal migration
are.
Rural to Urban
Urban to Rural
Inter-urban
Intra-urban
Transmigration

19. External:
Refers to international migration such are
fugees and labour migration.
International migration is the relatively long
distance movement between people.
Emigration is the departure of a person from
one country to live permanently in another.
Immigration is the entrance into a country of a
person with the aim of living there
permanently.
International migration can be Voluntary or
Forced.

20. People migrate due to PUSH and PULL factors
PUSH factors are those that cause people to
leave an area
PULL factors are those that encourage people
to move to an area
List push and pull factors that you can think of.

21. Push factors Pull factors
High population pressure
Economic hardship
Poor quality of life
Persecution
Forced out – ethnic cleansing
No jobs
Starvation and disasters
Marriage
Harsh environment

22. Pull Factors
Able to support population
More opportunities
Higher standard of living
Receptive society
Accepts refugees and asylum seekers
City life – bright lights
Partner works there

23. Reasons for Migration
People migrate for many different reasons.
These reasons can be classified as either
economic, social, political or environmental:
The impact of labour migration varies from
country to country. Economic migration can
have different effects resulting from the
volume, composition, and characteristics of the
migratory flows as well as the context in which
the flows take place.

24. For countries of origin, in addition to the
possibility of providing some relief from
unemployment and absorbing an increase in
the labour force, it can provide a form of
developmental support, especially through
remittances, transfer of know-how, and
creation of business and trade networks
For receiving countries facing labour
shortages, immigration can alleviate labour
scarcity, facilitate occupational mobility, and
add to the human capital stock of the receiving
countries