Labor markets and integrating national economies

Economic Integration, Factor Mobility, and Wage Convergence
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Hired labor might consist of a small number of apprentices, or, as in the early New England textile mills, a few child laborers hired from nearby farms Ware As a result labor market institutions remained small-scale and informal, and institutions for training and skill acquisition remained correspondingly limited. Workers learned on the job as apprentices or helpers; advancement came through establishing themselves as independent producers rather than through internal promotion. With the growth of manufacturing, and the spread of factory methods of production, especially in the years after the end of the Civil War, an increasing number of people could expect to spend their working-lives as employees.

One reflection of this change was the emergence in the s of the problem of unemployment. The growth of large factories and the creation of new kinds of labor skills specific to a particular employer created returns to sustaining long-term employment relationships.

As workers acquired job- and employer-specific skills their productivity increased giving rise to gains that were available only so long as the employment relationship persisted. Employers did little, however, to encourage long-term employment relationships. Instead authority over hiring, promotion and retention was commonly delegated to foremen or inside contractors Nelson , pp. In the latter case, skilled craftsmen operated in effect as their own bosses contracting with the firm to supply components or finished products for an agreed price, and taking responsibility for hiring and managing their own assistants.


These arrangements were well suited to promoting external mobility. Foremen were often drawn from the immigrant community and could easily tap into word-of-mouth channels of recruitment. But these benefits came increasingly into conflict with rising costs of hiring and training workers. The informality of personnel policies prior to World War I seems likely to have discouraged lasting employment relationships, and it is true that rates of labor turnover at the beginning of the twentieth century were considerably higher than they were to be later Owen, Scattered evidence on the duration of employment relationships gathered by various state labor bureaus at the end of the century suggests, however, at least some workers did establish lasting employment relationship Carter ; Carter and Savocca ; Jacoby and Sharma ; James The growing awareness of the costs of labor-turnover and informal, casual labor relations led reformers to advocate the establishment of more centralized and formal processes of hiring, firing and promotion, along with the establishment of internal job-ladders, and deferred payment plans to help bind workers and employers.

The Downside of Integrating Markets

Labor Markets and Integrating National Economies (Integrating National Economies: Promise and Pitfalls) [Ronald G. Ehrenberg] on * FREE*. timely book provides a wide-ranging and insightful discussion of how labor market institutions and policies influence the mechanisms of.

The implementation of these reforms did not make significant headway, however, until the s Slichter Why employers began to establish internal labor markets in the s remains in dispute. While some scholars emphasize pressure from workers Jacoby ; others have stressed that it was largely a response to the rising costs of labor turnover Edwards The growth of large factories contributed to rising labor tensions in the late nineteenth- and early twentieth-centuries. Issues like hours of work, safety, and working conditions all have a significant public goods aspect. While market forces of entry and exit will force employers to adopt policies that are sufficient to attract the marginal worker the one just indifferent between staying and leaving , less mobile workers may find that their interests are not adequately represented Freeman and Medoff One solution is to establish mechanisms for collective bargaining, and the years after the American Civil War were characterized by significant progress in the growth of organized labor Friedman Under prevailing legal interpretation, strikes were often found by the courts to be conspiracies in restraint of trade with the result that the apparatus of government was often arrayed against labor.

Although efforts to win significant improvements in working conditions were rarely successful, there were still areas where there was room for mutually beneficial change. One such area involved the provision of disability insurance for workers injured on the job. Traditionally, injured workers had turned to the courts to adjudicate liability for industrial accidents. Legal proceedings were costly and their outcome unpredictable.

By the early s it became clear to all sides that a system of disability insurance was preferable to reliance on the courts. Resolution of this problem, however, required the intervention of state legislatures to establish mandatory state workers compensation insurance schemes and remove the issue from the courts. Once introduced workers compensation schemes spread quickly: nine states passed legislation in ; 13 more had joined the bandwagon by , and by 44 states had such legislation Fishback Along with workers compensation state legislatures in the late nineteenth century also considered legislation restricting hours of work.

Prevailing legal interpretations limited the effectiveness of such efforts for adult males. But rules restricting hours for women and children were found to be acceptable. The federal government passed legislation restricting the employment of children under 14 in , but this law was found unconstitutional in Goldin , p. The economic crisis of the s triggered a new wave of government interventions in the labor market. During the s the federal government granted unions the right to organize legally, established a system of unemployment, disability and old age insurance, and established minimum wage and overtime pay provisions.

Although the NIRA was eventually ruled to be unconstitutional, the key labor provisions of the Act were reinstated in the Wagner Act of While some of the provisions of the Wagner Act were modified in by the Taft-Hartley Act, its passage marks the beginning of the golden age of organized labor. Union membership jumped very quickly after from around 12 percent of the non-agricultural labor force to nearly 30 percent, and by the late s had attained a peak of 35 percent, where it stabilized. Since the s, however, union membership has declined steadily, to the point where it is now back at pre-Wagner Act levels.

The Social Security Act of introduced a federal unemployment insurance scheme that was operated in partnership with state governments and financed through a tax on employers. It also created government old age and disability insurance. In , the federal Fair Labor Standards Act provided for minimum wages and for overtime pay. At first the coverage of these provisions was limited, but it has been steadily increased in subsequent years to cover most industries today. In the post-war era, the federal government has expanded its role in managing labor markets both directly—through the establishment of occupational safety regulations, and anti-discrimination laws, for example—and indirectly—through its efforts to manage the macroeconomy to insure maximum employment.

A further expansion of federal involvement in labor markets began in with passage of the Civil Rights Act, which prohibited employment discrimination against both minorities and women. In the Age Discrimination and Employment Act was passed prohibiting discrimination against people aged 40 to 70 in regard to hiring, firing, working conditions and pay.

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The Family and Medical Leave Act of allows for unpaid leave to care for infants, children and other sick relatives Goldin , p. Whether state and federal legislation has significantly affected labor market outcomes remains unclear. Rather than shaping market outcomes, many legislative initiatives emerged as a result of underlying changes that were making advances possible. According to Claudia Goldin , p. The rise of factories and urban employment had implications that went far beyond the labor market itself. On farms women and children had found ready employment Craig , ch.

But when the male household head worked for wages, employment opportunities for other family members were more limited. Late nineteenth-century convention largely dictated that married women did not work outside the home unless their husband was dead or incapacitated Goldin , p. Children, on the other hand, were often viewed as supplementary earners in blue-collar households at this time. Since changes in relative earnings power related to shifts in technology have encouraged women to enter the paid labor market while purchasing more of the goods and services that were previously produced within the home.

At the same time, the rising value of formal education has lead to the withdrawal of child labor from the market and increased investment in formal education Whaples During the first half of the twentieth century high school education became nearly universal. And since World War II, there has been a rapid increase in the number of college educated workers in the U. The function of labor markets is to match workers and jobs. As this essay has described the mechanisms by which labor markets have accomplished this task have changed considerably as the American economy has developed.

A central issue for economic historians is to assess how changing labor market institutions have affected the efficiency of labor markets. This leads to three sets of questions. The first concerns the long-run efficiency of market processes in allocating labor across space and economic activities. The second involves the response of labor markets to short-run macroeconomic fluctuations. The third deals with wage determination and the distribution of income. The ideal of complete equalization is, of course, unlikely to be achieved given the high information and transactions costs that characterize labor markets.

Thus, conclusions are usually couched in relative terms, comparing the efficiency of one market at one point in time with those of some other markets at other points in time. A further complication in measuring wage equalization is the need to compare homogeneous workers and to control for other differences such as cost of living and non-pecuniary amenities. Falling transportation and communications costs have encouraged a trend toward diminishing wage gaps over time, but this trend has not always been consistent over time, nor has it applied to all markets in equal measure.

That said, what stands out is in fact the relative strength of forces of market arbitrage that have operated in many contexts to promote wage convergence. At the beginning of the nineteenth century, the costs of trans-Atlantic migration were still quite high and international wage gaps large.

Figure 1 shows the movement of real wages relative to the United States in a selection of European countries. After the beginning of mass immigration wage differentials began to fall substantially in one country after another. International wage convergence continued up until the s, when it appears that the accelerating growth of the American economy outstripped European labor supply responses and reversed wage convergence briefly.

World War I and subsequent immigration restrictions caused a sharper break, and contributed to widening international wage differences during the middle portion of the twentieth century. Wage convergence also took place within some parts of the United States during the nineteenth century. Figure 2 traces wages in the North Central and Southern regions of the U. S relative to those in the Northeast across the period from to the early twentieth century.

Within the United States, wages in the North Central region of the country were 30 to 40 percent higher than in the East in the s Margo a, ch. Thereafter, wage gaps declined substantially, falling to the percent range before the Civil War. Despite some temporary divergence during the war, wage gaps had fallen to 5 to 10 percent by the s and s.

Much of this decline was made possible by faster and less expensive means of transportation, but it was also dependent on the development of labor market institutions linking the two regions, for while transportation improvements helped to link East and West, there was no corresponding North-South integration.

While southern wages hovered near levels in the Northeast prior to the Civil War, they fell substantially below northern levels after the Civil War, as Figure 2 illustrates. Notes and sources: Rosenbloom , p. It is not possible to assemble entirely consistent data on regional wage variations over such an extended period.

The nature of the wage data, the precise geographic coverage of the data, and the estimates of regional cost-of-living indices are all different. The earliest wage data—Margo ; Sundstrom and Rosenbloom and Coelho and Shepherd are all based on occupational wage rates from payroll records for specific occupations; Rosenbloom uses average earnings across all manufacturing workers; while Montgomery uses individual level wage data drawn from the Current Population Survey, and calculates geographic variations using a regression technique to control for individual differences in human capital and industry of employment.

I used the relative real wages that Montgomery reported for workers in manufacturing, and used an unweighted average of wages across the cities in each region to arrive at relative regional real wages. Interested readers should consult the various underlying sources for further details. Despite the large North-South wage gap Table 3 shows there was relatively little migration out of the South until large-scale foreign immigration came to an end.

Migration from the South during World War I and the s created a basis for future chain migration, but the Great Depression of the s interrupted this process of adjustment. Not until the s did the North-South wage gap begin to decline substantially Wright , pp. By the s the southern wage disadvantage had largely disappeared, and because of the decline fortunes of older manufacturing districts and the rise of Sunbelt cities, wages in the South now exceed those in the Northeast Coelho and Ghali ; Bellante ; Sahling and Smith ; Montgomery Despite these shocks, however, the overall variation in wages appears comparable to levels attained by the end of the nineteenth century.

Montgomery , for example finds that from to the standard deviation of wages across SMSAs was only about 10 percent of the average wage. If the actual increase exceeds the predicted increase this implies a net migration into the region; if the actual increase is less than predicted this implies net migration out of the region. In addition to geographic wage gaps economists have considered gaps between farm and city, between black and white workers, between men and women, and between different industries. The literature on these topics is quite extensive and this essay can only touch on a few of the more general themes raised here as they relate to U.

Studies of farm-city wage gaps are a variant of the broader literature on geographic wage variation, related to the general movement of labor from farms to urban manufacturing and services. Here comparisons are complicated by the need to adjust for the non-wage perquisites that farm laborers typically received, which could be almost as large as cash wages. The issue of whether such gaps existed in the nineteenth century has important implications for whether the pace of industrialization was impeded by the lack of adequate labor supply responses. By the second half of the nineteenth century at least, it appears that farm-manufacturing wage gaps were small and markets were relatively integrated Wright , pp.

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Margo , ch. Making comparisons within counties and states, he reports that farm wages were within 10 percent of urban wages in eight states. Analyzing data from the late nineteenth century through the s, Hatton and Williamson find that farm and city wages were nearly equal within U.

It appears, however that during the Great Depression farm wages were much more flexible than urban wages causing a large gap to emerge at this time Alston and Williamson Much attention has been focused on trends in wage gaps by race and sex. The twentieth century has seen a substantial convergence in both of these differentials. Table 4 displays comparisons of earnings of black males relative to white males for full time workers.

In , full-time black male workers earned only about 43 percent of what white male full-time workers did. By the racial pay ratio had risen to nearly 73 percent, but there has been little subsequent progress. Until the mids these gains can be attributed primarily to migration from the low-wage South to higher paying areas in the North, and to increases in the quantity and quality of black education over time Margo ; Smith and Welch Since then, however, most gains have been due to shifts in relative pay within regions.

Although it is clear that discrimination was a key factor in limiting access to education, the role of discrimination within the labor market in contributing to these differentials has been a more controversial topic see Wright , pp. But the episodic nature of black wage gains, especially after is compelling evidence that discrimination has played a role historically in earnings differences and that federal anti-discrimination legislation was a crucial factor in reducing its effects Donohue and Heckman Data for are from Ehrenberg and Smith , Table Male-Female wage gaps have also narrowed substantially over time.

Beginning in the late s or early s, relative female pay began to rise again, and today women earn about 80 percent what men do Goldin , table 3. Part of this remaining difference is explained by differences in the occupational distribution of men and women, with women tending to be concentrated in lower paying jobs. Whether these differences are the result of persistent discrimination or arise because of differences in productivity or a choice by women to trade off greater flexibility in terms of labor market commitment for lower pay remains controversial.

In addition to locational, sectoral, racial and gender wage differentials, economists have also documented and analyzed differences by industry. Krueger and Summers find that there are pronounced differences in wages by industry within well-specified occupational classes, and that these differentials have remained relatively stable over several decades. One interpretation of this phenomenon is that in industries with substantial market power workers are able to extract some of the monopoly rents as higher pay.

An alternative view is that workers are in fact heterogeneous, and differences in wages reflect a process of sorting in which higher paying industries attract more able workers. The existence of unemployment is one of the clearest indications of the persistent frictions that characterize labor markets. As described earlier, the concept of unemployment first entered common discussion with the growth of the factory labor force in the s.

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Unemployment was not a visible social phenomenon in an agricultural economy, although there was undoubtedly a great deal of hidden underemployment. Although one might have expected that the shift from spot toward more contractual labor markets would have increased rigidities in the employment relationship that would result in higher levels of unemployment there is in fact no evidence of any long-run increase in the level of unemployment.

Contemporaneous measurements of the rate of unemployment only began in Prior to this date, economic historians have had to estimate unemployment levels from a variety of other sources. Decennial censuses provide benchmark levels, but it is necessary to interpolate between these benchmarks based on other series. Conclusions about long-run changes in unemployment behavior depend to a large extent on the method used to interpolate between benchmark dates.

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Estimates prepared by Stanley Lebergott suggest that the average level of unemployment and its volatility have declined between the pre and post-World War II periods. Christina Romer a, b , however, has argued that there was no decline in volatility. While the aggregate behavior of unemployment has changed surprisingly little over the past century, the changing nature of employment relationships has been reflected much more clearly in changes in the distribution of the burden of unemployment Goldin , pp.

At the beginning of the twentieth century, unemployment was relatively widespread, and largely unrelated to personal characteristics. Southwest relative to the rest of the nation. Trade liberalization also affects the organization of industries. Consider the case of apparel production in Mexico. Under the closed economy, the Mexican apparel industry was organized around regional production networks.

This specialization pattern reflected regional-wage differences in Mexico. Wages were high in Mexico City, where skilled labor was in abundance and firms had good access to information about the national market, and wages were low in outlying regions, where less-skilled labor was in abundance and firms had relatively poor access to information about market conditions. After trade reform in Mexico, regional production networks have been recreated on a global scale.

Apparel assembly firms in outlying regions of Mexico have severed their ties to Mexico City and now rely on U. This shift caused the apparel industry in Mexico City to contract and led to an expansion in apparel assembly in outlying locations, particularly those on the Mexico-U. Global production networks are certainly not confined to North America. While U. In the s and s, Hong Kong was a major exporter of apparel, footwear, and other labor-intensive items, often producing under subcontract for large buyers in the United States, Europe, and Japan. Since China began to open its economy to foreign trade and investment in the late s, Hong Kong has begun to specialize in business services for mainland China.

Hong Kong firms have moved most of their manufacturing operations to the mainland, in particular to the neighboring province of Guandong, leaving their management offices in Hong Kong where they design and market the goods that China produces. Hong Kong now distributes about one-half of the manufacturing exports that China produces. Hong Kong's role in intermediating China's exports is linked to information costs in international exchange. Important questions for future work include how outsourcing from Hong Kong to China affects labor markets and industry structure in these regions and in the rest of Asia, and how changes in transport costs and information technology affect the nature of global outsourcing networks.

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Feenstra, ed. Borjas, R. Freeman, and L. See J. Bound and G. Katz and K. See E. Berman, J.

Labor Markets and Integrating National Economies

Bound, and Z. Manufacturing Industries," Quarterly Journal of Economics , , pp. Katz and D. Ashenfelter and D. Card, eds. Amsterdam: Elsevier, ; D. See R. Hummels, J. Ishii, and K. Feenstra and G. Feenstra, G. Grossman, and D. Irwin, eds. Support is long-lasting and involves professional issues integration, learning and development, relationships with the professional environment , as well as those complementary issues such as independent living, the development of social skills, transport, coordination with social actors and so on.

The recently adopted European Pillar of Social Rights is a step in the right direction and delivers a clear message for policy makers developing regulations on the labour market in its principles 3 to 6. Individuals, regardless of their background, should be supported to enter the open labour market, receiving a fair wage and allowing them to become active economic citizens.

Principle 6 also underlines the need that work should receive fair wages, in order to prevent in-work poverty. With legislative tools such as the UN CRPD, the European Disability, the European Pillar of Social Rights, the Council Recommendation on the integration of the long-term unemployed and others, it is now clearly the responsibility of policy makers at all levels to facilitate the development of more inclusive labour markets.

EASPD truly hopes that the European Commission will fully use the opportunities of the European Semester and the new Multiannual Financial Framework to support and encourage Member States in implementing the necessary legal framework to make the labour market accessible to all. Regardless of the legal weight the Pillar might have in the future, EASPD is also committed to champion these rights and support its members and support services across Europe in showing how the principles of the Pillar of Social Rights can be implemented in the field, what benefit they can bring and what is needed for their successful implementation.