Essay About Relative Price Of Labor And Factor Price Equalization Theory

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The article states that migration flow has increased was that free trade increased the unskilled worker wage differential between Mexico and the United States. The factor price equalization theory explains a countrys movement from autarky to free trade and how it will tend to equalize relative factor prices across national borders. Thus, trade tends to raise the relative price of labor in Mexico, because labor is intensively used in the expanding labor-intensive export industries. The demand for labor therefore increases, raising its relative price in Mexico. At the same time, the relative price of labor tends to fall in the United States as free trade opens. The autarky price of labor was high in the United States because it is a labor scarce country. As free trade begins, the United States begins to rely less on its own production of labor intensive goods and instead imports cheaper labor intensive goods from Mexico. As the labor-intensive sector in the United States contracts, the relative price of labor falls. In theory, this pattern continues until the relative price of labor in the United States and the relative price of labor in Mexico have reached equality at some level between the two autarky equilibrium. Base on this theory, the people of Mexico have no incentives to migrate to the U.S. where free trade has cause U.S. to rely less on labor-intensive jobs as it is importing labor-intensive products rather then making it. This results in lower wages for labor jobs in the U.S. In contrast, free trade has caused Mexico to rely heavily on its labor-intensive products raising wages in labor-intensity jobs in Mexico as there is a need for more laborers. Relative high wages in autarky U.S. has decrease while relative low wages in autarky Mexico has increase due to free trade. This theory shows that unskilled worker wage differential between Mexico and the U.S. does not increased due to free trade. The wage gap should be similarly equalized