Föhrenbergkreis Finanzwirtschaft

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Wages through the ages

Posted by hkarner - 16. Juni 2017

Date: 15-06-2017
Source: The Economist

What history says about inequality and technology

The recent rise in earnings for skilled workers is a rare phenomenon

ONE factor behind the rise of income inequality in America over the past four decades is that the labour market has increasingly favoured the well-educated. Real wages for college graduates have risen by over a third since 1963, whereas wages for those without high-school diplomas have dropped. As more of the economy becomes automated, doomsayers worry that the gap between the haves and the have-nots will only grow. History shows, however, that this need not be so.

The recent rise in earnings for skilled workers is a rare historical phenomenon. Compiling records from churches, monasteries, colleges, guilds and governments, Gregory Clark, an economist at the University of California, Davis, has put together a comprehensive dataset of English wages that stretches back to the 13th century. Mr Clark notes that in the past the skilled-wage premium, defined as the difference in wages between craftsmen, such as carpenters and masons, and unskilled labourers has been fairly stable, save for two sharp declines (see chart).

The first drop came in the 14th century, and had nothing to do with technological change. Life expectancy in medieval England was short and interest rates were high, meaning that taking on the seven-year apprenticeship needed to become a craftsman came with a heavy opportunity cost. But interest rates started falling in this period, from around 10% in 1290 to 7.5% in 1340. When the Black Death struck England in 1348, wiping out a third of the population, interest rates fell further, to 5%, and apprenticeships became much more attractive. The increased supply of skilled labour relative to unskilled workers drove down the wage premium. Data from Jan Luiten van Zanden of Utrecht University show similar patterns in Belgium, France and the Netherlands.

The second big decline in the skilled-wage premium came after the Industrial Revolution. Inventions like the power loom displaced artisans, and increased the relative demand for unskilled labour. Craftsmen whose skills took years to hone suddenly found themselves being replaced by machines operated by workers with just a few months’ training. (The Luddites reacted by smashing the machines.) One study has found that the share of unskilled workers rose from 20% of the labour force in England in 1700 to 39% in 1850. The ratio of craftsmen’s wages to labourers’ started to fall in the early 1800s, and did not recover until 1960.

Using a different inequality measure leads to slightly different results. Peter Lindert, also at the University of California, Davis, says that as middle-skilled jobs in England disappeared, the Gini coefficient of household earnings rose, peaking in 1800. The share of earnings captured by the top 1% reached a high in around 1870. But the two measures then went on to fall, not bottoming out until the mid-20th century.

What distinguishes the advances of the computer age from those of the Industrial Revolution is that they have favoured skilled workers. So far, university degrees have been a reliable proxy for skill but this may change as artificial intelligence starts taking jobs away from white-collar workers. Projections from America’s Bureau of Labour Statistics show that four of the five fastest-growing occupations in the country involve personal care; none of those jobs requires a bachelor’s degree.

In any case, to assume that current economic trends will persist is to assume an inefficient labour market. Ken Rogoff, an economist at Harvard, argues that as the wage premium for a particular group of workers rises, firms will have a greater incentive to replace them.

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