Factor price equalization

Factor price equalization is an economic theory, which states that the prices for two identical factors of production in the same market will eventually equal each other because of competition.

An often-cited example of factor price equalization is wages. When two countries enter a free trade agreement, wages for identical jobs in both countries tend to approach each other. After NAFTA was signed, for instance, unskilled labor wages gradually fell in the United States, at the same time as they gradually rose in Mexico. The same force has applied more recently to the various countries of the European Union.