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The Resolution of the Labor-Scarcity Paradox

Published online by Cambridge University Press:  03 March 2009

John A. James  and
Jonathan S. Skinner
John A. James
Affiliation:
members of the Department of Economics, University of Virginia, Charlottesville, Virginia 22901 and are Research Associate and Faculty Research Fellow of the National Bureau of Economic Research.
Jonathan S. Skinner
Affiliation:
members of the Department of Economics, University of Virginia, Charlottesville, Virginia 22901 and are Research Associate and Faculty Research Fellow of the National Bureau of Economic Research.
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Abstract

Many distinguished foreign visitors to the United States in the 1850s commented on the advanced states of mechanization in manufacturing. But why, at the same time, were interest rates higher and the aggregate manufacturing capital stock lower in American than in Britain? We resolve this paradox by noting that British engineers were most impressed by only those industries which relied on skilled workers. Using production parameters estimated from 1849 census data, we develop a computable general equilibrium model of the American and British economies which reconciles the apparently contradictory evidence.

Type
Articles
Information
The Journal of Economic History , Volume 45 , Issue 3 , September 1985 , pp. 513 - 540
Copyright
Copyright © The Economic History Association 1985

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References

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2 Temin, “Labor Scarcity,” pp. 283–84.; Habakkuk, American and British Technology, p. 215. Even if the machines, the nature of skilled labor, and capital-labor relations in manufacturing differed between America and Britain, such complications are not essential to explaining the laborscarcity result and reconciling the empirical evidence.Google Scholar An interpretation emphasizing such factors may be found in Lazonick, William, “Production Relations, Labor Productivity, and Choice of Technique: British and U.S. Cotton Spinning,” this JOURNAL, 41 (09 1981), pp. 491–516.Google Scholar Note as well that as a result of specifying common, well-defined production functions, we rule out the possibility of a factor-intensity reversal caused by a shift in technology. In such a case a higher interest rate (in the United States, say) might be associated with a more capital-intensive technology. See, Yeager, Leland, “Toward Understanding Some Paradoxes in Capital Theory,” Economic Inquiry, 14 (09 1976), pp. 323–24;CrossRefGoogle ScholarField, Alexander J., “Land Abundance, Interest/Profit Rates, and Nineteenth-Century American and British Technology,” this JOURNAL, 43 (06 1983), pp. 429–31.Google Scholar

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9 Habakkuk, American and British Technology, p. 5. For example, Earle and Hoffman flatly and erroneously assert, “Most American industries used demonstrably more machinery than equivalent British industries”.Google Scholar Their analysis of the labor scarcity question is particularly confused, but they do find that “the characteristic feature of American capitalism” is the use of “cheap, instead of expensive inputs, provided any differences in productivity are overcome.” Earle, Carville and Hoffman, Ronald, ”The Foundation of the Modern Economy: Agriculture and the Costs of Labor in the United States and England, 1800–60,” American Historical Review, 85 (12 1980), pp. 1057, 1090.CrossRefGoogle Scholar

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The importance of the distinction between skilled and unskilled labor to the labor-scarcity result, emphasized by Habakkuk, has also been noted by Uselding, Brito and Williamson, and Goldin and Sokoloff. Goldin and Sokoloff in particular emphasize the use of women and children in manufacturing as another response to the problem of expensive male labor. Uselding, “Technical Progress”. Uselding, Paul, “Studies of Technology in Economic History,” in Gallman, Robert, ed., Recent Developments in the Study of Business and Economic Hitory: Essays in Memory of Herman E. Krooss (Greenwich, Conn., 1977), pp. 159–220;Google Scholar Brito and Williamson, “Skilled Labor”; Goldin, Claudia and Sokoloff, Kenneth, “Women, Children, and Industrialization in the Early Republic: Evidence from Manufacturing Censuses,” this JOURNAL, 42 (12 1982), pp. 742, 755–56.Google Scholar

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13 Restricting the use of skilled labor to skilled manufacturing and unskilled labor to unskilled manufacturing ignores the possibility of substituting among skilled labor, unskilled labor, and capital in a generalized four-factor production function. The specification of such a function however would present a very complex problem. Habakkuk, for example, although he quoted Andrew Ure to the effect that early manufacturing growth involved the substitution of unskilled labor and capital for skilled labor, argued that more capital-intensive production methods required more skilled labor per unit output than relatively labor-intensive ones. Later writers have focused on one thread or the other of this argument. Williamson and Lindert assumed skilled labor and capital to have been relative complements, while Harley in his study of Edwardian industry emphasized the substitution of unskilled labor and capital for skilled labor.Habakkuk, American and British Technology, pp. 24, 153–54.;Google ScholarWilliamson, Jeffrey and Lindert, Peter, American Inequality (New York, 1980);Google ScholarHarley, C. K., “Skilled Labour and the Choice of Technique in Edwardian Industry,” Explorations in Economic History, 11 (Summer 1974), pp. 391–414.CrossRefGoogle Scholar

A related question is what separates skilled from unskilled workers? We assume that the skilled workers have built up human capital on the job and are earning a normal return on their investment. In addition, skilled workers may earn rents on ability which are worthless in the less-skilled sector, but valuable in the skilled sector. Who becomes skilled, and who remains unskilled, however, is not at issue here.

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The function is not necessarily linearly homogeneous, although by appropriate scaling of ρs or ρU, local linear homogeneity can be assured. Note also that the production function will generally not be homothetic; thus at constant factor prices, scale effects will cause differing proportions of inputs to be used.

15 Habakkuk also raised the possibility that if the tariff had been levied primarily on relatively labor-intensive imports, it would have raised real wages relative to capital and thereby shifted American demand toward products made by capital-intensive techniques. The antebellum tariff did in fact increase real wages the most, but its principal effect was to increase the returns to both labor and capital at the expense of land and slaveholders. Habakkuk, American and British Technology, pp. 41, 43;Google ScholarJames, John A., “The Welfare Effects of the Antebellum Tariff: A General Equilibrium Analysis,” Explorations in Economic History, 15 (07 1978), p. 248.CrossRefGoogle Scholar

16 Prices are not taken to be fixed at world levels in spite of the presence of an international sector. The protection of tariffs and distance makes it quite reasonable that American producers faced downward sloping demand curves. The British manufacturing industries, dominant in the world market, must have faced them as well.Google Scholar

A similar specification of consumption demands may be found in Williamson and Lindert, American Inequality, p. 225.Google Scholar

17 Value of output is deflated by the Coelho and Shepherd regional price index. Labor input is measured by total employment with one additional worker per firm added to correct for entrepreneurial labor input, following Sokoloff. Atack has shown that different measures of labor input, such as taking interstate variation in the sex composition of the labor force into account, for example, has only very small effects on parameter estimates in nineteenth-century American production functions. Capital figures used are those reported in the Census of Manufactures, which are argued by Davis and Gallman to have represented market values. The measure of agricultural goods input, A, is taken as the value of raw material inputs deflated by a regional index of natural resource prices. The observations are weighted by the ratio of the number of firms in a given state to the total. Coelho, Philip and Shepherd, James, “Differences in Regional Prices: The United States, 1851–1880,” this JOURNAL, 34 (09 1974), pp. 551–91;Google Scholar Sokoloff, “Was the Transition from the Artisanal Shop”; Atack, Jeremy, “Estimation of Economies of Scale in Nineteenth Century United States Manufacturing and the Form of the Production Function,” (Ph.D diss., Indiana University, 1976), p. 279;Google ScholarDavis and Gallman, “Capital Formation in the United States,” p. 9; James, “Some Evidence,” pp. 385–86.Google Scholar

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24 The production function itself was based on data for southern agriculture, although Fogel and Engerman take the estimated factor shares to have prevailed in northern agriculture as well in their relative efficiency calculations. We use these estimates rather than Gallman's, which are based on assumed rates of return to agricultural capital much lower than the ones in our model. Fogel, Robert and Engerman, Stanley, Time on the Cross, vol. 2 (Boston, 1974), pp. 131, 133.Google ScholarGallman, Robert, “Changes in Total U.S. Agricultural Factor Productivity in the Nineteenth Century” in Kelsey, Darwin, ed., Farming in the New Nation (Washington, D.C., 1972), pp.191–210.Google Scholar

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27 In general, there has been little effort made to refine these measures of factor endowments. For example, because of insufficient data labor-force totals have not been adjusted for differences in composition, such as by converting them into a measure of male equivalent workers. Differences between slave and free workers in terms of hours worked are neglected as well. Land input is simply measured in acres, not taking fertility differences between the United States and Britain into account.Google Scholar

28 Mitchell and Deane, British Historical Statistics, pp. 289–92, 297.Google Scholar

29 Solving the model in this way ensures local stability, although the model may fail to converge for extreme parameters or odd starting values.Google Scholar

30 Abbott reported daily unskilled wages of $0.91. Noting that women comprised 26 percent of unskilled workers and that their relative wage was approximately 60 percent of men's (although this differential varied by region), average annual wages for 310 days of work would have been $253. Abbott, Edith, The Wages of Unskilled Labor in the United States, 1850–1900 (Chicago, 1905); Goldin and Sokoloff, “Women, Children, and Industrialization”.Google Scholar

31 Budd, working up from wage data and including implicit earnings of slaves, finds the labor share more than exhausts agricultural sector income in 1850, a rather improbable result. Part of this discrepancy might be the result of assuming that slave workers, like free workers, receive the going wage, Budd, Edward C., “Factor Shares, 1850–1910,” in Trends in the American Economy, pp. 384–85.Google Scholar

32 Bateman, Fred and Weiss, Thomas, A Deplorable Scarcity, (Chapel Hill, N.C., 1981), pp. 116, 193–95.Google Scholar The problem with using this more inclusive measure of capital (including working capital) in the model, which greatly reduces divergences in sectoral rates of return, is that there is not a good measure of working capital for Britain. American entrepreneurs, responding to higher interest rates, were generally viewed as conserving on working capital and holding smaller inventories than their British counterparts, but we do not know exactly how much lower. In any case, it should be noted that the higher return to capital in manufacturing than in agriculture is consistent with the results of Bateman and Weiss. Field, “Land Abundance,” pp. 414–15;Google ScholarBateman and Weiss, Deplorable Scarcity, p. 130.Google Scholar

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36 See, Summers and Clarke, “Labor Scarcity Controversy”.Google Scholar

37 Habakkuk, American and British Technology, pp. 15–16, 25.Google Scholar

38 Detailed results from this and the following alternative simulations discussed in the text are reported in NBER Working Paper number 1504 or are available upon request from the authors.Google Scholar

39 pp. 153–54.Google Scholar

40 This model is more Habakkukian in spirit even if not in all exact details than previous contributions to the labor-scarcity debate. It is however still too simple to reflect the richness of detail and multitudes of conjectures in the original. For example, we neglect the effects of his suggestion of possible differences in the price of capital goods across countries, because somewhat tenuous evidence from 1865 indicates that capital prices may have been roughly comparable between the two countries by around mid-century. The mean prices of machines that year produced by the British firm of Greenwood and Battey was £89 as compared with £92, the average price of machine tools sold in England by the American firm of Brown and Sharpe. Similarly, we also do not take into account the implications of greater imperfections in American labor and product markets. Nevertheless, the model is still complex enough to reconcile the stylized facts of labor scarcity. Habakkuk, American and British Technology, p. 68–69, 74, 75;Google ScholarFloud, Roderick, The British Machine Tool Industry, 1850–1914 (Cambridge, 1976), pp. 113–14.CrossRefGoogle Scholar

41 Temin, Peter, “Labor Scarcity in America,” Journal of Interdisciplinary History, 1 (Winter 1971), p. 262.CrossRefGoogle Scholar

42 Note that the focus has shifted from land abundance increasing the agricultural wage (Habakkuk) to the influence of abundant natural resources, primarily through decreasing the cost of power thereby spurring mechanization. By land abundance here therefore we really mean natural resource abundance.Google Scholar

43 Habakkuk, American and British Technology, pp. 126–27, 194–95. Note also that a more elastic supply of unskilled workers after mid-century would seem to imply a lower manufacturing capital-labor ratio in America rather than a higher one.Google Scholar

44 Feinstein, Charles, National Income, Expenditure, and Output of the United Kingdom, 1855–1965 (Cambridge, 1972), p. T99;Google ScholarU.S. Census Office, Twelfth Census of the United States, 1900, Volume VII: Manufactures (Washington, D.C., 1902).Google Scholar This calculation of the British capital-labor ratio in manufacturing assumes the share of manufacturing capital in the gross reproducible capital stock to have been the same in 1880 and 1890 as in 1920. The same pattern also held for specific industries. The capital-labor ratio in American textiles was $1,963 in 1899, while in British textiles the ratio was, in 1907, $811 at par exchange rates. Similarly, the 1899 American ratio in iron and steel was about four times the corresponding British figure. Great Britain Board of Trade, Final Report of Production of the United Kingdom, 1907 (London, 1913), pp. 13, 35;Google ScholarU.S. Bureau of the Census, Thirteenth Census of the United States, 1910, Volume VIII: Manufactures (Washington, D.C., 1913).Google Scholar

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48 p. 342.Google Scholar See also, Church, R. A., “Nineteenth-Century Clock Technology in Britain, the United States, and Switzerland,” Economic History Review, 28 (11 1975), pp. 616–30.CrossRefGoogle Scholar

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53 Hoover, Ethel, “Retail Prices after 1850,” in Trends in the American Economy, pp. 177–78.Google Scholar This figure probably understates the American advantage, because firewood and rents were excluded from cost of living adjustments. In both of these categories American prices should have been lower.

54 This result violates well-known properties of index numbers, but American and British weights do not cover the same range of commodities, American weights being more detailed. The results are consistent, however, in indicating substantially higher American real wages.Google Scholar

55 Adams, “Some Evidence on English and American Wage Rates.”Google Scholar

56 Rosenberg, Nathan, “Anglo-American Wages Differences in the 1820s,” this JOURNAL, 27 (06 1967), pp. 221–29;Google ScholarWilliamson and Lindert, American Inequality; Margo, Robert and Villaflor, Georgia, “Report of Persons Hired: New Evidence on Antebellum Skill Differentials” (unpublished manuscript, 1985).Google Scholar See also, Zabler, Jeffrey, “Further Evidence on American Wage Differentials, 1800–1830,” Explorations in Economic History, 10 (Fall 1972), pp. 109–17;CrossRefGoogle ScholarAdams, Donald, “Wages in the Iron Industry: A Comment,” Explorations in Economic History, 11 (Fall 1973), pp. 89–99.CrossRefGoogle Scholar

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58 Lindert Williamson, “English Worker' Living Standards”.Google Scholar

59 Constructed from Tabler 4. Deane and Cole, British Economic Growth pp. 143, 152; Lindert and Williamson, “English Workers' Living Standards,” p. 4. These figures are overstimates of the true rate of return because they omit working capital from the denominator; see fn. 32.Google Scholar

60 Summers and Clarke, “Labor Scarcity Controversy,” p. 134.Google Scholar

61 Field, “Land Abundance,” pp. 414–15.Google ScholarWilliamson, Jeffrey, American Growth and the Balance of Payments, 1820–1913, (Chapel Hill, N.C., 1964), pp. 89–124.Google Scholar

62 Brito and Williamson also emphasize another factor influencing the cost of capital services, differences in the relative price of investment goods across countries caused by a relatively higher tariff on consumption than capital goods. Brito and Williamson, “Skilled Labour and Managerial Behavior”.Google Scholar

63 p. 243; Field, “Land Abundance,” pp.412–13.Google Scholar