incentives to change occupations—that is, until wages were equalized in
all uses.
In fact, however, wage differentials obviously occur. As it is with labour,
so it is with the other factors of production, land and capital. Factor-price
differentials can be divided into two types: those that exist only
temporarily and those that exist in long-run equilibrium.
Temporary factor-price differentials lead to, and are eroded by, factor mobility. Equilibrium
differentials in factor prices are not eliminated by factor mobility.Temporary Differentials
Some factor-price differentials reflect temporary disturbances, such as the
growth of one industry or the decline of another. The differentials
themselves lead to the movement of factors, and such movements in turn
act to eliminate the differentials.
As an example, consider the effect on factor prices of a rise in the demand
for air transport when there is no change in the demand for rail transport.
Specifically, consider the wages for the individuals who organize and
handle freight shipments in the two industries. The airline industry’s
demand for workers increases while there is no change in demand for
workers in the railway industry. Wages will rise in the airline industry and
create a factor-price differential. The differential in wages causes a net
movement of workers away from the railway industry and toward the
airline industry, and this movement causes the wage differentials to