The Economics of Labor Mobility

Have you ever imagined what life would be like in another job or working in another country? It wasn't that long ago such a daydream would have to remain just that. However, as governments the world over continue to loosen restrictions on who can take what job, opportunities have popped up across the globe for qualified workers. Read on to find out how this change took place and how labor mobility really works.

What Is Labor Mobility?

Labor mobility refers to the ease with which laborers are able to move around within an economy and between different economies. It is an important factor in the study of economics because it looks at how labor, one of the major factors of production, affects growth and production.

There are two primary types of labor mobility: geographic and occupational. Geographic mobility refers to a worker's ability to work in a particular physical location, while occupational mobility refers to a worker's ability to change job types. For example, a worker moving from the United States to France illustrates the concept of geographic mobility. An automobile mechanic who changes jobs to become an airline pilot reflects the concept of occupational mobility. (For related reading, see: Get a Finance Job Overseas.)

Why Does Geographic Mobility Matter?

From a policymaker's perspective, geographic mobility can have important implications on the economy of a particular country. This is because easing immigration requirements can do several things:

  • Increase the supply of labor. As more workers enter the economy, the general labor supply increases. An increase in labor supply accompanied by a static labor demand can decrease wage rates.
  • Increase unemployment. Unless employers demand more workers, an increase in labor supply could lead to a glut in labor. This means more workers are available than jobs. (For more on this, see: Surveying The Employment Report.)
  • Increase productivity. Not all laborers added to the labor supply will be unskilled. An influx in laborers can increase productivity if they bring specialized skills to the workplace, and they might push out existing employees who are less productive. (For related reading, see: Economic Indicators: Employee Cost Index (ECI))

Obtaining geographic mobility is not a purely economic matter. It can also be an issue of state sovereignty and government control. After all, governments are also concerned with security, and completely open borders mean governments are not sure who or what is coming into their countries. While increased geographic mobility generally has a positive impact on the economy, it is also one of the first targets to incur the wrath of both citizens and their representatives. Immigration is already a hot-button topic, both in the United States and abroad.

A reduction in geographic restrictions can be reached in several different ways. Between countries, it is accomplished through treaties or economic agreements. Countries can also increase the number of worker visas available, or reduce the requirements of receiving one. For example, countries that are part of the European Union have fewer restrictions on the movement of labor between members, but can still place tight restrictions on labor movement from non-member countries.

The effectiveness of improved geographic mobility will ultimately depend on individual workers. If economic opportunities are not available in a different country or in a different part of one's current country, the likelihood of an employee wanting to make a change will be diminished.

Why Does Occupational Mobility Matter?

The ease with which employees can move from a job in one particular industry to a job in a different industry determines how quickly an economy can develop. For example, if there was zero occupational mobility, we would still be hunter-gatherers, because no one would have been able to become farmers or specialists.

An easing of occupational mobility restrictions can do several things:

  • Increase the supply of labor in particular industries. Lower restrictions cause laborers to have an easier time entering a different industry, which can mean the demand for labor is more readily met.
  • Lower wage rates. If it is easier for laborers to enter a particular industry, the supply of labor will increase for a given demand, which lowers the wage rate until equilibrium is reached. (For more insight, see: Exploring the Minimum Wage.)
  • Allow nascent industries to grow. If an economy is shifting toward new industries, employees must be available to run that industry's businesses. A shortage of employees means overall productivity can be negatively impacted because there aren't enough employees to provide the service or work the machines used to make the product. (For related reading, see: Employability, the Labor Force and the Economy.)

Occupational mobility can be restricted through regulations. Licensing, training, or education requirements prevent the free flow of labor from one industry to another. For example, restrictions limit the supply of physicians, since specialized training and licensing is required to work in that particular profession. This is why physicians can command higher wages because the demand for physicians coupled with a restricted supply increases the equilibrium wage. This funnels unqualified members of the labor force into industries with fewer restrictions, keeping the wage rate lower through a higher labor supply compared to the amount of labor demanded.

Labor Mobility: Two Perspectives

Labor mobility affects workers on two levels: the aggregate level and the personal level.

On a personal level, increased labor mobility gives workers an opportunity to improve their financial situations. If workers are permitted to train for new jobs, move locations, or seek higher wages, they are more likely to be happy working, which can have a positive impact on productivity. Workers who do not feel indefinitely relegated to low wages or jobs with few benefits will consistently seek better positions, which also makes it easier for new industries to attract the most qualified applicants by offering better perks. 

The aggregate level refers to the economy as a whole. The extent to which labor forces are mobile can impact how quickly an economy can adapt to technological changes, how quickly competitive advantages can be exploited, and how innovative industries develop. Restrictions placed on how workers move around, either geographically or occupationally, can slow growth by making it more difficult for businesses to hire productive workers. At the same time, unrestricted labor can depress wages in certain industries and create unemployment. (To learn more, see: Competitive Advantage Counts.)

The Bottom Line

As labor mobility improves, so do the lives of workers around the globe. As a general rule, workers are able to find better-paying jobs and improve their living situations when less control is placed on where they can move and what occupations they can apply for. At the same time, businesses improve because workers receive better training and the right employee can be hired. Economies improve as productivity improves.