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Monday, May 13, 2013

Generating the Wealth of Nations 10: Wages in the US Relative to Wages in the UK, 1800-1914

As Prof. Borland noted in the lecture, one of the things economists expect to happen in cases in which two countries have different resource endowments, this:  If The US has abundant land and scarce labor, while the UK has (relatively) abundant labor and scarce land, the US will tend to specialize in the production of goods and services that are land-intensive, while the UK will tend to specialize in the production of goods and services that are labor-intensive.  Over time, the demand for land will grow relative to the demand for labor in the US, while the demand for labor will tend to grow relative to the demand for land in the UK.  This will result in the price of land in the US rising relative to the price of land in the UK, and the price of labor in the UK rising relative to the price of labor in the US.  (There's actually a famous Theorem in economics about this, the Stolper-Samuelson Theorem.)  I happened to know where to find a series of wage data for the UK and an index of the wages of unskilled labor (with 1860 = 100) for the US (David, Paul A. and Peter Solar, (1977).  "A Bicentenary Contribution to Research the History of the Cost of Living in America," Pages 1-80 in Volume 2 of Explorations in Economic History , Greenwich: JAI Press, Inc. (Table B.1 p. 59).  So I was able to convert the UK wage series into an index centered on 100 in 1860, and then compute the US wage index relative to the UK wage index, also centered at 100 in 1860.  (How's that for a lengthy explanation?)  Here's what it looks like, from 1800 to 1914:

(Click to enlarge.)

It shows two periods in which wages in the US fall relative to those in England--during the Civil War and during the 1870s, a period in which the US economy was experiencing severe deflation.  Other than those two episodes, though, it's not apparent that there was a persistent long-term downward trend in US wages relative to wages in the UK.  Even if we would expect that mostly to have happened early in the development in both countreis following the beginning of the Industrial Revolution (because the US economy shifted considerably to a manufacturing base in the last few dacades of the 19th century), that's not apparent either.  So it's probably the case that something else was happening besides the relative factor abundance.


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