Factor Mobility and Income Redistribution

Factor Mobility and Income Redistribution


Production of goods is determined by various factors which include land, labor, and capital. The demand for labor is usually based on the price of a commodity as well as wage rate channeled to the employees (Voitchovsky, 2005). This research will analyze the effects on the incomes of workers, capitalists, and landowners in the home economy when the price of food, (Pf) increases by 8 percent, and the price of cloth, (Pc) remains constant.


Labor is a valuable input in the production process. Demand for labor is given by the function: DDl= f(P, w). This implies that changes in prices food affects the demand for labor and therefore the number of workers needed in the production of food and clothes (Rooth & Stenberg, 2011). Demand for labor increases and, the nominal wage rate given to the workers in exchange of labor falls. With no changes in the price of clothes, the nominal wage of employees remains stable since the demand for labor equals the supply of labor.


Capitalists invest in trade in an economic system based on private ownership for profit. With land being the fundamental factor determining the production of food, capital the core factor for producing cloth, and labor acting as a mobile factor for both, the central capitalism of the capitalists is based on the capital accumulation, wage labor, and the pricing system. Increase in prices of food results in more profits and the real wages paid to workers rise (Pontusson, 2005). The purchasing power of consumers increases as quantity demanded declines. When the prices of cloth remain constant, there is no effect on the current profits, thus no effect on the real wages paid to workers.


The land is the mobile factor of production for both food and cloth. With an increase in prices of food (Pf), purchasing power rises while demand decreases. The landowner makes fewer profits from this process, the real wages paid to the workers also falls (Rooth & Stenberg, 2011). When the price of cloth, (Pc) remain constant, the stability of profits gained by land owners is maintained as well as real wages for the workers and the purchasing power persists.

Tabulated Summary

Category                                Effects

Workers                      (i) The nominal wage rate decreases

(ii) Real wage rate is not affected by


Capitalists                   (i) Capitalists make more profits

(ii) The real wages paid to workers increase

Purchasing power of customers  rises

Landowners    Make fewer profits due to decreased demand for products.

(i)The real wages rates paid to the workers fall too.

The above table gives a summary of effects of an increase in prices on the level of economy in the capitalists, workers, and landowners.

Specific Factor Model Assumption

Factor models refer to the means of separating the factors that determine the rate of return on an economy specific objectives. The immobile factor model assumes that the cost of labor (Lc) and cost of wage rates (Wc) are always exogenous in the case of production (Voitchovsky, 2005). The immobile factor assumption represents different situations for producing food and cloth. In a short-run scenario. The model assumes that perfect competition prevails in all the markets in an economy.


Factors of production like labor, capital, and land can be reallocated across different sectors in the domestic economy (Pontusson, 2005). Changes in prices of a good have an effect on the real wage rates of workers, profitability of capitalist firms, and the purchasing power of consumers. Therefore, factor mobility and income redistribution go hand to hand in the production of different goods for a country.


  • Pontusson, J. (2005). Inequality and prosperity: social Europe vs. liberal America. New York: Cornell University Press.
  • Rooth, D., & Stenberg, A. (2011). The shape of the income distribution and economic growth: evidence from Swedish labor market regions. Chicago: Adventure Works Press.
  • Voitchovsky, S. (2005). Does the profile of income inequality matter for economic growth? Journal of Economic Growth, 273-296.