In Class Quiz October 8, 2013
Question:
What factor or factors explain real wage convergence between the old world and the new during the period roughly 1870-1914?
Did everyone benefit equally from the process?
Answer:
Before talking about convergence, it useful to say something about the level of real wages in the old world and in the new. In the old world, wages were relatively low because there was an abundance of labour while in the new world there was a scarcity of labour so that real wages there were relatively high. The question then: what forces were operating during this period to push up the real wages in the old world and/or down in the new world (and to move land rents in the opposite direction)? As many of you said, there were essentially three: 1. Migration, the movement of young, able-bodied, unskilled, mostly male workers from the old world to the new, pushed up the real wage in the old world as the labour force shrank and caused it to decline in the new world as the labour force increased. O’Rourke and Williamson maintain that migration explains most of the convergence during this period – in fact, it over-explains it. 2. The second was commodity market integration, thanks to technological advances in transportation – steam ships, railroads, refrigeration – that substantially reduced the cost of moving goods between the old world and the new and increased the variety and type of goods that could be moved. As a result, natural resources and farm products, including meats, fruits, and so on, flowed into the old world from the new and manufactured goods went in the other direction. 3. Third, according to Eli Heckscher and Bertil Ohlin, two Swedish economists, countries (or, in our case, areas) will have a comparative advantage in those goods which use intensively their abundant factors of production. In our case, the old world specialized in goods that used lots of labour (manufactures) and the new world specialized in goods that used lots of land (natural resources and agricultural commodities). These specializations caused the demand for labour and thus the real wage to go up in the old world while they caused the demand for labour and the real wage to slip in the new. 4. Some of you mentioned a fourth – the gold standard which some economists have argued increased trade among countries on the gold standard and thus fostered real wage convergence.
For the record, international capital flows did not promote real wage convergence.
As for the second part of the question, everyone did not benefit equally from the process. Workers in the old world saw their real wages go up, landowners saw their returns decline while in the new, exactly the opposite occurred. In a distributional sense, incomes became relatively more equal in the old world and relatively less equal in the new.