Question

Specific factors - International trade

why does labor being mobile accross sectors automatically inply revenue maximization? Explain carefully?

Answer 1

Labor being mobile essentially means that labor can be employed from one sector to another. Workers can move from one job to another job. Firms can easily employ labor which is cheap and unskilled if the labor force is able to move across several sectors.

It essentially means that even if there are several industries, each and every industry can employ labor from another industry. This leads to more labor supply as there is a huge labor surplus which leads to firms deciding the level of wages in the economy and opting to give the lowest possible wage rate possible as there is ample labor supply and even if a person doesn't agree with the wage, the firm can easily employ another. This leads to revenue maximisation as the firm is able to employ labor at a cheap cost and enhance productivity at the same time as firms are the decision makers.

Whereas if there was no labor mobility, firms would have had a fixed labor supply which they would had to employ in order to function in the economy, this could have led to increased costs of production as that industry specific labor supply would have been limited while the demand could have been higher. This would have led to higher wages and low revenue as costs of production would have increased. Additionally because of limited labor mobility, firms would need to employ same set of people who demand higher wages and showcase low productivity, which further dents revenue growth.