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An Economic History of New Zealand in the Nineteenth and Twentieth Centuries

John Singleton, Victoria University of Wellington, New Zealand

Living standards in New Zealand were among the highest in the world between the late nineteenth century and the 1960s. But New Zealand’s economic growth was very sluggish between 1950 and the early 1990s, and most Western European countries, as well as several in East Asia, overtook New Zealand in terms of real per capita income. By the early 2000s, New Zealand’s GDP per capita was in the bottom half of the developed world.

Table 1:
Per capita GDP in New Zealand
compared with the United States and Australia
(in 1990 international dollars)

US Australia New Zealand NZ as
% of US
NZ as % of
Austrialia
1840 1588 1374 400 25 29
1900 4091 4013 4298 105 107
1950 9561 7412 8456 88 114
2000 28129 21540 16010 57 74

Source: Angus Maddison, The World Economy: Historical Statistics. Paris: OECD, 2003, pp. 85-7.

Over the second half of the twentieth century, argue Greasley and Oxley (1999), New Zealand seemed in some respects to have more in common with Latin American countries than with other advanced western nations. As well as a snail-like growth rate, New Zealand followed highly protectionist economic policies between 1938 and the 1980s. (In absolute terms, however, New Zealanders continued to be much better off than their Latin American counterparts.) Maddison (1991) put New Zealand in a middle-income group of countries, including the former Czechoslovakia, Hungary, Portugal, and Spain.

Origins and Development to 1914

When Europeans (mainly Britons) started to arrive in Aotearoa (New Zealand) in the early nineteenth century, they encountered a tribal society. Maori tribes made a living from agriculture, fishing, and hunting. Internal trade was conducted on the basis of gift exchange. Maori did not hold to the Western concept of exclusive property rights in land. The idea that land could be bought and sold was alien to them. Most early European residents were not permanent settlers. They were short-term male visitors involved in extractive activities such as sealing, whaling, and forestry. They traded with Maori for food, sexual services, and other supplies.

Growing contact between Maori and the British was difficult to manage. In 1840 the British Crown and some Maori signed the Treaty of Waitangi. The treaty, though subject to various interpretations, to some extent regularized the relationship between Maori and Europeans (or Pakeha). At roughly the same time, the first wave of settlers arrived from England to set up colonies including Wellington and Christchurch. Settlers were looking for a better life than they could obtain in overcrowded and class-ridden England. They wished to build a rural and largely self-sufficient society.

For some time, only the Crown was permitted to purchase land from Maori. This land was then either resold or leased to settlers. Many Maori felt – and many still feel – that they were forced to give up land, effectively at gunpoint, in return for a pittance. Perhaps they did not always grasp that land, once sold, was lost forever. Conflict over land led to intermittent warfare between Maori and settlers, especially in the 1860s. There was brutality on both sides, but the Europeans on the whole showed more restraint in New Zealand than in North America, Australia, or Southern Africa.

Maori actually required less land in the nineteenth century because their numbers were falling, possibly by half between the late eighteenth and late nineteenth centuries. By the 1860s, Maori were outnumbered by British settlers. The introduction of European diseases, alcohol, and guns contributed to the decline in population. Increased mobility and contact between tribes may also have spread disease. The Maori population did not begin to recover until the twentieth century.

Gold was discovered in several parts of New Zealand (including Thames and Otago) in the mid-nineteenth century, but the introduction of sheep farming in the 1850s gave a more enduring boost to the economy. Australian and New Zealand wool was in high demand in the textile mills of Yorkshire. Sheep farming necessitated the clearing of native forests and the planting of grasslands, which changed the appearance of large tracts of New Zealand. This work was expensive, and easy access to the London capital market was critical. Economic relations between New Zealand and Britain were strong, and remained so until the 1970s.

Between the mid-1870s and mid-1890s, New Zealand was adversely affected by weak export prices, and in some years there was net emigration. But wool prices recovered in the 1890s, just as new exports – meat and dairy produce – were coming to prominence. Until the advent of refrigeration in the early 1880s, New Zealand did not export meat and dairy produce. After the introduction of refrigeration, however, New Zealand foodstuffs found their way on to the dinner tables of working class families in Britain, but not the tables of the middle and upper classes, as they could afford fresh produce.

In comparative terms, the New Zealand economy was in its heyday in the two decades before 1914. New Zealand (though not its Maori shadow, Aotearoa) was a wealthy, dynamic, and egalitarian society. The total population in 1914 was slightly above one million. Exports consisted almost entirely of land-intensive pastoral commodities. Manufactures loomed large in New Zealand’s imports. High labor costs, and the absence of scale economies in the tiny domestic market, hindered industrialization, though there was some processing of export commodities and imports.

War, Depression and Recovery, 1914-38

World War One disrupted agricultural production in Europe, and created a robust demand for New Zealand’s primary exports. Encouraged by high export prices, New Zealand farmers borrowed and invested heavily between 1914 and 1920. Land exchanged hands at very high prices. Unfortunately, the early twenties brought the start of a prolonged slump in international commodity markets. Many farmers struggled to service and repay their debts.

The global economic downturn, beginning in 1929-30, was transmitted to New Zealand by the collapse in commodity prices on the London market. Farmers bore the brunt of the depression. At the trough, in 1931-32, net farm income was negative. Declining commodity prices increased the already onerous burden of servicing and repaying farm mortgages. Meat freezing works, woolen mills, and dairy factories were caught in the spiral of decline. Farmers had less to spend in the towns. Unemployment rose, and some of the urban jobless drifted back to the family farm. The burden of external debt, the bulk of which was in sterling, rose dramatically relative to export receipts. But a protracted balance of payments crisis was avoided, since the demand for imports fell sharply in response to the drop in incomes. The depression was not as serious in New Zealand as in many industrial countries. Prices were more flexible in the primary sector and in small business than in modern, capital-intensive industry. Nevertheless, the experience of depression profoundly affected New Zealanders’ attitudes towards the international economy for decades to come.

At first, there was no reason to expect that the downturn in 1929-30 was the prelude to the worst slump in history. As tax and customs revenue fell, the government trimmed expenditure in an attempt to balance the budget. Only in 1931 was the severity of the crisis realized. Further cuts were made in public spending. The government intervened in the labor market, securing an order for an all-round reduction in wages. It pressured and then forced the banks to reduce interest rates. The government sought to maintain confidence and restore prosperity by helping farms and other businesses to lower costs. But these policies did not lead to recovery.

Several factors contributed to the recovery that commenced in 1933-34. The New Zealand pound was devalued by 14 percent against sterling in January 1933. As most exports were sold for sterling, which was then converted into New Zealand pounds, the income of farmers was boosted at a stroke of the pen. Devaluation increased the money supply. Once economic actors, including the banks, were convinced that the devaluation was permanent, there was an increase in confidence and in lending. Other developments played their part. World commodity prices stabilized, and then began to pick up. Pastoral output and productivity continued to rise. The 1932 Ottawa Agreements on imperial trade strengthened New Zealand’s position in the British market at the expense of non-empire competitors such as Argentina, and prefigured an increase in the New Zealand tariff on non-empire manufactures. As was the case elsewhere, the recovery in New Zealand was not the product of a coherent economic strategy. When beneficial policies were adopted it was as much by accident as by design.

Once underway, however, New Zealand’s recovery was comparatively rapid and persisted over the second half of the thirties. A Labour government, elected towards the end of 1935, nationalized the central bank (the Reserve Bank of New Zealand). The government instructed the Reserve Bank to create advances in support of its agricultural marketing and state housing schemes. It became easier to obtain borrowed funds.

An Insulated Economy, 1938-1984

A balance of payments crisis in 1938-39 was met by the introduction of administrative restrictions on imports. Labour had not been prepared to deflate or devalue – the former would have increased unemployment, while the latter would have raised working class living costs. Although intended as a temporary expedient, the direct control of imports became a distinctive feature of New Zealand economic policy until the mid-1980s.

The doctrine of “insulationism” was expounded during the 1940s. Full employment was now the main priority. In the light of disappointing interwar experience, there were doubts about the ability of the pastoral sector to provide sufficient work for New Zealand’s growing population. There was a desire to create more industrial jobs, even though there seemed no prospect of achieving scale economies within such a small country. Uncertainty about export receipts, the need to maintain a high level of domestic demand, and the competitive weakness of the manufacturing sector, appeared to justify the retention of quantitative import controls.

After 1945, many Western countries retained controls over current account transactions for several years. When these controls were relaxed and then abolished in the fifties and early sixties, the anomalous nature of New Zealand’s position became more visible. Although successive governments intended to liberalize, in practice they achieved little, except with respect to trade with Australia.

The collapse of the Korean War commodity boom, in the early 1950s, marked an unfortunate turning point in New Zealand’s economic history. International conditions were unpropitious for the pastoral sector in the second half of the twentieth century. Despite the aspirations of GATT, the United States, Western Europe and Japan restricted agricultural imports, especially of temperate foodstuffs, subsidized their own farmers and, in the case of the Americans and the Europeans, dumped their surpluses in third markets. The British market, which remained open until 1973, when the United Kingdom was absorbed into the EEC, was too small to satisfy New Zealand. Moreover, even the British resorted to agricultural subsidies. Compared with the price of industrial goods, the price of agricultural produce tended to weaken over the long term.

Insulation was a boon to manufacturers, and New Zealand developed a highly diversified industrial structure. But competition was ineffectual, and firms were able to pass cost increases on to the consumer. Import barriers induced many British, American, and Australian multinationals to establish plants in New Zealand. The protected industrial economy did have some benefits. It created jobs – there was full employment until the 1970s – and it increased the stock of technical and managerial skills. But consumers and farmers were deprived of access to cheaper – and often better quality – imported goods. Their interests and welfare were neglected. Competing demand from protected industries also raised the costs of farm inputs, including labor power, and thus reduced the competitiveness of New Zealand’s key export sector.

By the early 1960s, policy makers had realized that New Zealand was falling behind in the race for greater prosperity. The British food market was under threat, as the Macmillan government began a lengthy campaign to enter the protectionist EEC. New Zealand began to look for other economic partners, and the most obvious candidate was Australia. In 1901, New Zealand had declined to join the new federation of Australian colonies. Thus it had been excluded from the Australian common market. After lengthy negotiations, a partial New Zealand-Australia Free Trade Agreement (NAFTA) was signed in 1965. Despite initial misgivings, many New Zealand firms found that they could compete in the Australian market, where tariffs against imports from the rest of the world remained quite high. But this had little bearing on their ability to compete with European, Asian, and North American firms. NAFTA was given renewed impetus by the Closer Economic Relations (CER) agreement of 1983.

Between 1973 and 1984, New Zealand governments were overwhelmed by a group of inter-related economic crises, including two serious supply shocks (the oil crises), rising inflation, and increasing unemployment. Robert Muldoon, the National Party (conservative) prime minister between 1975 and 1984, pursued increasingly erratic macroeconomic policies. He tightened government control over the economy in the early eighties. There were dramatic fluctuations in inflation and in economic growth. In desperation, Muldoon imposed a wage and price freeze in 1982-84. He also mounted a program of large-scale investments, including the expansion of a steel works, and the construction of chemical plants and an oil refinery. By means of these investments, he hoped to reduce the import bill and secure a durable improvement in the balance of payments. But the “Think Big” strategy failed – the projects were inadequately costed, and inherently risky. Although Muldoon’s intention had been to stabilize the economy, his policies had the opposite effect.

Economic Reform, 1984-2000

Muldoon’s policies were discredited, and in 1984 the Labour Party came to power. All other economic strategies having failed, Labour resolved to deregulate and restore the market process. (This seemed very odd at the time.) Within a week of the election, virtually all controls over interest rates had been abolished. Financial markets were deregulated, and, in March 1985, the New Zealand dollar was floated. Other changes followed, including the sale of public sector trading organizations, the reduction of tariffs and the elimination of import licensing. However, reform of the labor market was not completed until the early 1990s, by which time National (this time without Muldoon or his policies) was back in office.

Once credit was no longer rationed, there was a large increase in private sector borrowing, and a boom in asset prices. Numerous speculative investment and property companies were set up in the mid-eighties. New Zealand’s banks, which were not used to managing risk in a deregulated environment, scrambled to lend to speculators in an effort not to miss out on big profits. Many of these ventures turned sour, especially after the 1987 share market crash. Banks were forced to reduce their lending, to the detriment of sound as well as unsound borrowers.

Tight monetary policy and financial deregulation led to rising interest rates after 1984. The New Zealand dollar appreciated strongly. Farmers bore the initial brunt of high borrowing costs and a rising real exchange rate. Manufactured imports also became more competitive, and many inefficient firms were forced to close. Unemployment rose in the late eighties and early nineties. The early 1990s were marked by an international recession, which was particularly painful in New Zealand, not least because of the high hopes raised by the post-1984 reforms.

An economic recovery began towards the end of 1991. With a brief interlude in 1998, strong growth persisted for the remainder of the decade. Confidence was gradually restored to the business sector. Unemployment began to recede. After a lengthy time lag, the economic reforms seemed to be paying off for the majority of the population.

Large structural changes took place after 1984. Factors of production switched out of the protected manufacturing sector, and were drawn into services. Tourism boomed as the relative cost of international travel fell. The face of the primary sector also changed, and the wine industry began to penetrate world markets. But not all manufacturers struggled. Some firms adapted to the new environment and became more export-oriented. For instance, a small engineering company, Scott Technology, became a world leader in the provision of equipment for the manufacture of refrigerators and washing machines.

Annual inflation was reduced to low single digits by the early nineties. Price stability was locked in through the 1989 Reserve Bank Act. This legislation gave the central bank operational autonomy, while compelling it to focus on the achievement and maintenance of price stability rather than other macroeconomic objectives. The Reserve Bank of New Zealand was the first central bank in the world to adopt a regime of inflation targeting. The 1994 Fiscal Responsibility Act committed governments to sound finance and the reduction of public debt.

By 2000, New Zealand’s population was approaching four million. Overall, the reforms of the eighties and nineties were responsible for creating a more competitive economy. New Zealand’s economic decline relative to the rest of the OECD was halted, though it was not reversed. In the nineties, New Zealand enjoyed faster economic growth than either Germany or Japan, an outcome that would have been inconceivable a few years earlier. But many New Zealanders were not satisfied. In particular, they were galled that their closest neighbor, Australia, was growing even faster. Australia, however, was an inherently much wealthier country with massive mineral deposits.

Assessment

Several explanations have been offered for New Zealand’s relatively poor economic performance during the twentieth century.

Wool, meat, and dairy produce were the foundations of New Zealand’s prosperity in Victorian and Edwardian times. After 1920, however, international market conditions were generally unfavorable to pastoral exports. New Zealand had the wrong comparative advantage to enjoy rapid growth in the twentieth century.

Attempts to diversify were only partially successful. High labor costs and the small size of the domestic market hindered the efficient production of standardized labor-intensive goods (e.g. garments) and standardized capital-intensive goods (e.g. autos). New Zealand might have specialized in customized and skill-intensive manufactures, but the policy environment was not conducive to the promotion of excellence in niche markets. Between 1938 and the 1980s, Latin American-style trade policies fostered the growth of a ramshackle manufacturing sector. Only in the late eighties did New Zealand decisively reject this regime.

Geographical and geological factors also worked to New Zealand’s disadvantage. Australia drew ahead of New Zealand in the 1960s, following the discovery of large mineral deposits for which there was a big market in Japan. Staple theory suggests that developing countries may industrialize successfully by processing their own primary products, instead of by exporting them in a raw state. Canada had coal and minerals, and became a significant industrial power. But New Zealand’s staples of wool, meat and dairy produce offered limited downstream potential.

Canada also took advantage of its proximity to the U.S. market, and access to U.S. capital and technology. American-style institutions in the labor market, business, education and government became popular in Canada. New Zealand and Australia relied on, arguably inferior, British-style institutions. New Zealand was a long way from the world’s economic powerhouses, and it was difficult for its firms to establish and maintain contact with potential customers and collaborators in Europe, North America, or Asia.

Clearly, New Zealand’s problems were not all of its own making. The elimination of agricultural protectionism in the northern hemisphere would have given a huge boost the New Zealand economy. On the other hand, in the period between the late 1930s and mid-1980s, New Zealand followed inward-looking economic policies that hindered economic efficiency and flexibility.

References

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Citation: Singleton, John. “New Zealand in the Nineteenth and Twentieth Centuries”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/an-economic-history-of-new-zealand-in-the-nineteenth-and-twentieth-centuries/

Economic History of Malaysia

John H. Drabble, University of Sydney, Australia

General Background

The Federation of Malaysia (see map), formed in 1963, originally consisted of Malaya, Singapore, Sarawak and Sabah. Due to internal political tensions Singapore was obliged to leave in 1965. Malaya is now known as Peninsular Malaysia, and the two other territories on the island of Borneo as East Malaysia. Prior to 1963 these territories were under British rule for varying periods from the late eighteenth century. Malaya gained independence in 1957, Sarawak and Sabah (the latter known previously as British North Borneo) in 1963, and Singapore full independence in 1965. These territories lie between 2 and 6 degrees north of the equator. The terrain consists of extensive coastal plains backed by mountainous interiors. The soils are not naturally fertile but the humid tropical climate subject to monsoonal weather patterns creates good conditions for plant growth. Historically much of the region was covered in dense rainforest (jungle), though much of this has been removed for commercial purposes over the last century leading to extensive soil erosion and silting of the rivers which run from the interiors to the coast.

SINGAPORE

The present government is a parliamentary system at the federal level (located in Kuala Lumpur, Peninsular Malaysia) and at the state level, based on periodic general elections. Each Peninsular state (except Penang and Melaka) has a traditional Malay ruler, the Sultan, one of whom is elected as paramount ruler of Malaysia (Yang dipertuan Agung) for a five-year term.

The population at the end of the twentieth century approximated 22 million and is ethnically diverse, consisting of 57 percent Malays and other indigenous peoples (collectively known as bumiputera), 24 percent Chinese, 7 percent Indians and the balance “others” (including a high proportion of non-citizen Asians, e.g., Indonesians, Bangladeshis, Filipinos) (Andaya and Andaya, 2001, 3-4)

Significance as a Case Study in Economic Development

Malaysia is generally regarded as one of the most successful non-western countries to have achieved a relatively smooth transition to modern economic growth over the last century or so. Since the late nineteenth century it has been a major supplier of primary products to the industrialized countries; tin, rubber, palm oil, timber, oil, liquified natural gas, etc.

However, since about 1970 the leading sector in development has been a range of export-oriented manufacturing industries such as textiles, electrical and electronic goods, rubber products etc. Government policy has generally accorded a central role to foreign capital, while at the same time working towards more substantial participation for domestic, especially bumiputera, capital and enterprise. By 1990 the country had largely met the criteria for a Newly-Industrialized Country (NIC) status (30 percent of exports to consist of manufactured goods). While the Asian economic crisis of 1997-98 slowed growth temporarily, the current plan, titled Vision 2020, aims to achieve “a fully developed industrialized economy by that date. This will require an annual growth rate in real GDP of 7 percent” (Far Eastern Economic Review, Nov. 6, 2003). Malaysia is perhaps the best example of a country in which the economic roles and interests of various racial groups have been pragmatically managed in the long-term without significant loss of growth momentum, despite the ongoing presence of inter-ethnic tensions which have occasionally manifested in violence, notably in 1969 (see below).

The Premodern Economy

Malaysia has a long history of internationally valued exports, being known from the early centuries A.D. as a source of gold, tin and exotics such as birds’ feathers, edible birds’ nests, aromatic woods, tree resins etc. The commercial importance of the area was enhanced by its strategic position athwart the seaborne trade routes from the Indian Ocean to East Asia. Merchants from both these regions, Arabs, Indians and Chinese regularly visited. Some became domiciled in ports such as Melaka [formerly Malacca], the location of one of the earliest local sultanates (c.1402 A.D.) and a focal point for both local and international trade.

From the early sixteenth century the area was increasingly penetrated by European trading interests, first the Portuguese (from 1511), then the Dutch East India Company [VOC](1602) in competition with the English East India Company [EIC] (1600) for the trade in pepper and various spices. By the late eighteenth century the VOC was dominant in the Indonesian region while the EIC acquired bases in Malaysia, beginning with Penang (1786), Singapore (1819) and Melaka (1824). These were major staging posts in the growing trade with China and also served as footholds from which to expand British control into the Malay Peninsula (from 1870), and northwest Borneo (Sarawak from 1841 and North Borneo from 1882). Over these centuries there was an increasing inflow of migrants from China attracted by the opportunities in trade and as a wage labor force for the burgeoning production of export commodities such as gold and tin. The indigenous people also engaged in commercial production (rice, tin), but remained basically within a subsistence economy and were reluctant to offer themselves as permanent wage labor. Overall, production in the premodern economy was relatively small in volume and technologically undeveloped. The capitalist sector, already foreign dominated, was still in its infancy (Drabble, 2000).

The Transition to Capitalist Production

The nineteenth century witnessed an enormous expansion in world trade which, between 1815 and 1914, grew on average at 4-5 percent a year compared to 1 percent in the preceding hundred years. The driving force came from the Industrial Revolution in the West which saw the innovation of large scale factory production of manufactured goods made possible by technological advances, accompanied by more efficient communications (e.g., railways, cars, trucks, steamships, international canals [Suez 1869, Panama 1914], telegraphs) which speeded up and greatly lowered the cost of long distance trade. Industrializing countries required ever-larger supplies of raw materials as well as foodstuffs for their growing populations. Regions such as Malaysia with ample supplies of virgin land and relative proximity to trade routes were well placed to respond to this demand. What was lacking was an adequate supply of capital and wage labor. In both aspects, the deficiency was supplied largely from foreign sources.

As expanding British power brought stability to the region, Chinese migrants started to arrive in large numbers with Singapore quickly becoming the major point of entry. Most arrived with few funds but those able to amass profits from trade (including opium) used these to finance ventures in agriculture and mining, especially in the neighboring Malay Peninsula. Crops such as pepper, gambier, tapioca, sugar and coffee were produced for export to markets in Asia (e.g. China), and later to the West after 1850 when Britain moved toward a policy of free trade. These crops were labor, not capital, intensive and in some cases quickly exhausted soil fertility and required periodic movement to virgin land (Jackson, 1968).

Tin

Besides ample land, the Malay Peninsula also contained substantial deposits of tin. International demand for tin rose progressively in the nineteenth century due to the discovery of a more efficient method for producing tinplate (for canned food). At the same time deposits in major suppliers such as Cornwall (England) had been largely worked out, thus opening an opportunity for new producers. Traditionally tin had been mined by Malays from ore deposits close to the surface. Difficulties with flooding limited the depth of mining; furthermore their activity was seasonal. From the 1840s the discovery of large deposits in the Peninsula states of Perak and Selangor attracted large numbers of Chinese migrants who dominated the industry in the nineteenth century bringing new technology which improved ore recovery and water control, facilitating mining to greater depths. By the end of the century Malayan tin exports (at approximately 52,000 metric tons) supplied just over half the world output. Singapore was a major center for smelting (refining) the ore into ingots. Tin mining also attracted attention from European, mainly British, investors who again introduced new technology – such as high-pressure hoses to wash out the ore, the steam pump and, from 1912, the bucket dredge floating in its own pond, which could operate to even deeper levels. These innovations required substantial capital for which the chosen vehicle was the public joint stock company, usually registered in Britain. Since no major new ore deposits were found, the emphasis was on increased efficiency in production. European operators, again employing mostly Chinese wage labor, enjoyed a technical advantage here and by 1929 accounted for 61 percent of Malayan output (Wong Lin Ken, 1965; Yip Yat Hoong, 1969).

Rubber

While tin mining brought considerable prosperity, it was a non-renewable resource. In the early twentieth century it was the agricultural sector which came to the forefront. The crops mentioned previously had boomed briefly but were hard pressed to survive severe price swings and the pests and diseases that were endemic in tropical agriculture. The cultivation of rubber-yielding trees became commercially attractive as a raw material for new industries in the West, notably for tires for the booming automobile industry especially in the U.S. Previously rubber had come from scattered trees growing wild in the jungles of South America with production only expandable at rising marginal costs. Cultivation on estates generated economies of scale. In the 1870s the British government organized the transport of specimens of the tree Hevea Brasiliensis from Brazil to colonies in the East, notably Ceylon and Singapore. There the trees flourished and after initial hesitancy over the five years needed for the trees to reach productive age, planters Chinese and European rushed to invest. The boom reached vast proportions as the rubber price reached record heights in 1910 (see Fig.1). Average values fell thereafter but investors were heavily committed and planting continued (also in the neighboring Netherlands Indies [Indonesia]). By 1921 the rubber acreage in Malaysia (mostly in the Peninsula) had reached 935 000 hectares (about 1.34 million acres) or some 55 percent of the total in South and Southeast Asia while output stood at 50 percent of world production.

Fig.1. Average London Rubber Prices, 1905-41 (current values)

As a result of this boom, rubber quickly surpassed tin as Malaysia’s main export product, a position that it was to hold until 1980. A distinctive feature of the industry was that the technology of extracting the rubber latex from the trees (called tapping) by an incision with a special knife, and its manufacture into various grades of sheet known as raw or plantation rubber, was easily adopted by a wide range of producers. The larger estates, mainly British-owned, were financed (as in the case of tin mining) through British-registered public joint stock companies. For example, between 1903 and 1912 some 260 companies were registered to operate in Malaya. Chinese planters for the most part preferred to form private partnerships to operate estates which were on average smaller. Finally, there were the smallholdings (under 40 hectares or 100 acres) of which those at the lower end of the range (2 hectares/5 acres or less) were predominantly owned by indigenous Malays who found growing and selling rubber more profitable than subsistence (rice) farming. These smallholders did not need much capital since their equipment was rudimentary and labor came either from within their family or in the form of share-tappers who received a proportion (say 50 percent) of the output. In Malaya in 1921 roughly 60 percent of the planted area was estates (75 percent European-owned) and 40 percent smallholdings (Drabble, 1991, 1).

The workforce for the estates consisted of migrants. British estates depended mainly on migrants from India, brought in under government auspices with fares paid and accommodation provided. Chinese business looked to the “coolie trade” from South China, with expenses advanced that migrants had subsequently to pay off. The flow of immigration was directly related to economic conditions in Malaysia. For example arrivals of Indians averaged 61 000 a year between 1900 and 1920. Substantial numbers also came from the Netherlands Indies.

Thus far, most capitalist enterprise was located in Malaya. Sarawak and British North Borneo had a similar range of mining and agricultural industries in the 19th century. However, their geographical location slightly away from the main trade route (see map) and the rugged internal terrain costly for transport made them less attractive to foreign investment. However, the discovery of oil by a subsidiary of Royal Dutch-Shell starting production from 1907 put Sarawak more prominently in the business of exports. As in Malaya, the labor force came largely from immigrants from China and to a lesser extent Java.

The growth in production for export in Malaysia was facilitated by development of an infrastructure of roads, railways, ports (e.g. Penang, Singapore) and telecommunications under the auspices of the colonial governments, though again this was considerably more advanced in Malaya (Amarjit Kaur, 1985, 1998)

The Creation of a Plural Society

By the 1920s the large inflows of migrants had created a multi-ethnic population of the type which the British scholar, J.S. Furnivall (1948) described as a plural society in which the different racial groups live side by side under a single political administration but, apart from economic transactions, do not interact with each other either socially or culturally. Though the original intention of many migrants was to come for only a limited period (say 3-5 years), save money and then return home, a growing number were staying longer, having children and becoming permanently domiciled in Malaysia. The economic developments described in the previous section were unevenly located, for example, in Malaya the bulk of the tin mines and rubber estates were located along the west coast of the Peninsula. In the boom-times, such was the size of the immigrant inflows that in certain areas they far outnumbered the indigenous Malays. In social and cultural terms Indians and Chinese recreated the institutions, hierarchies and linguistic usage of their countries of origin. This was particularly so in the case of the Chinese. Not only did they predominate in major commercial centers such as Penang, Singapore, and Kuching, but they controlled local trade in the smaller towns and villages through a network of small shops (kedai) and dealerships that served as a pipeline along which export goods like rubber went out and in return imported manufactured goods were brought in for sale. In addition Chinese owned considerable mining and agricultural land. This created a distribution of wealth and division of labor in which economic power and function were directly related to race. In this situation lay the seeds of growing discontent among bumiputera that they were losing their ancestral inheritance (land) and becoming economically marginalized. As long as British colonial rule continued the various ethnic groups looked primarily to government to protect their interests and maintain peaceable relations. An example of colonial paternalism was the designation from 1913 of certain lands in Malaya as Malay Reservations in which only indigenous people could own and deal in property (Lim Teck Ghee, 1977).

Benefits and Drawbacks of an Export Economy

Prior to World War II the international economy was divided very broadly into the northern and southern hemispheres. The former contained most of the industrialized manufacturing countries and the latter the principal sources of foodstuffs and raw materials. The commodity exchange between the spheres was known as the Old International Division of Labor (OIDL). Malaysia’s place in this system was as a leading exporter of raw materials (tin, rubber, timber, oil, etc.) and an importer of manufactures. Since relatively little processing was done on the former prior to export, most of the value-added component in the final product accrued to foreign manufacturers, e.g. rubber tire manufacturers in the U.S.

It is clear from this situation that Malaysia depended heavily on earnings from exports of primary commodities to maintain the standard of living. Rice had to be imported (mainly from Burma and Thailand) because domestic production supplied on average only 40 percent of total needs. As long as export prices were high (for example during the rubber boom previously mentioned), the volume of imports remained ample. Profits to capital and good smallholder incomes supported an expanding economy. There are no official data for Malaysian national income prior to World War II, but some comparative estimates are given in Table 1 which indicate that Malayan Gross Domestic Product (GDP) per person was easily the leader in the Southeast and East Asian region by the late 1920s.

Table 1
GDP per Capita: Selected Asian Countries, 1900-1990
(in 1985 international dollars)

1900 1929 1950 1973 1990
Malaya/Malaysia1 6002 1910 1828 3088 5775
Singapore - - 22763 5372 14441
Burma 523 651 304 446 562
Thailand 594 623 652 1559 3694
Indonesia 617 1009 727 1253 2118
Philippines 735 1106 943 1629 1934
South Korea 568 945 565 1782 6012
Japan 724 1192 1208 7133 13197

Notes: Malaya to 19731; Guesstimate2; 19603

Source: van der Eng (1994).

However, the international economy was subject to strong fluctuations. The levels of activity in the industrialized countries, especially the U.S., were the determining factors here. Almost immediately following World War I there was a depression from 1919-22. Strong growth in the mid and late-1920s was followed by the Great Depression (1929-32). As industrial output slumped, primary product prices fell even more heavily. For example, in 1932 rubber sold on the London market for about one one-hundredth of the peak price in 1910 (Fig.1). The effects on export earnings were very severe; in Malaysia’s case between 1929 and 1932 these dropped by 73 percent (Malaya), 60 percent (Sarawak) and 50 percent (North Borneo). The aggregate value of imports fell on average by 60 percent. Estates dismissed labor and since there was no social security, many workers had to return to their country of origin. Smallholder incomes dropped heavily and many who had taken out high-interest secured loans in more prosperous times were unable to service these and faced the loss of their land.

The colonial government attempted to counteract this vulnerability to economic swings by instituting schemes to restore commodity prices to profitable levels. For the rubber industry this involved two periods of mandatory restriction of exports to reduce world stocks and thus exert upward pressure on market prices. The first of these (named the Stevenson scheme after its originator) lasted from 1 October 1922- 1 November 1928, and the second (the International Rubber Regulation Agreement) from 1 June 1934-1941. Tin exports were similarly restricted from 1931-41. While these measures did succeed in raising world prices, the inequitable treatment of Asian as against European producers in both industries has been debated. The protective policy has also been blamed for “freezing” the structure of the Malaysian economy and hindering further development, for instance into manufacturing industry (Lim Teck Ghee, 1977; Drabble, 1991).

Why No Industrialization?

Malaysia had very few secondary industries before World War II. The little that did appear was connected mainly with the processing of the primary exports, rubber and tin, together with limited production of manufactured goods for the domestic market (e.g. bread, biscuits, beverages, cigarettes and various building materials). Much of this activity was Chinese-owned and located in Singapore (Huff, 1994). Among the reasons advanced are; the small size of the domestic market, the relatively high wage levels in Singapore which made products uncompetitive as exports, and a culture dominated by British trading firms which favored commerce over industry. Overshadowing all these was the dominance of primary production. When commodity prices were high, there was little incentive for investors, European or Asian, to move into other sectors. Conversely, when these prices fell capital and credit dried up, while incomes contracted, thus lessening effective demand for manufactures. W.G. Huff (2002) has argued that, prior to World War II, “there was, in fact, never a good time to embark on industrialization in Malaya.”

War Time 1942-45: The Japanese Occupation

During the Japanese occupation years of World War II, the export of primary products was limited to the relatively small amounts required for the Japanese economy. This led to the abandonment of large areas of rubber and the closure of many mines, the latter progressively affected by a shortage of spare parts for machinery. Businesses, especially those Chinese-owned, were taken over and reassigned to Japanese interests. Rice imports fell heavily and thus the population devoted a large part of their efforts to producing enough food to stay alive. Large numbers of laborers (many of whom died) were conscripted to work on military projects such as construction of the Thai-Burma railroad. Overall the war period saw the dislocation of the export economy, widespread destruction of the infrastructure (roads, bridges etc.) and a decline in standards of public health. It also saw a rise in inter-ethnic tensions due to the harsh treatment meted out by the Japanese to some groups, notably the Chinese, compared to a more favorable attitude towards the indigenous peoples among whom (Malays particularly) there was a growing sense of ethnic nationalism (Drabble, 2000).

Postwar Reconstruction and Independence

The returning British colonial rulers had two priorities after 1945; to rebuild the export economy as it had been under the OIDL (see above), and to rationalize the fragmented administrative structure (see General Background). The first was accomplished by the late 1940s with estates and mines refurbished, production restarted once the labor force had been brought back and adequate rice imports regained. The second was a complex and delicate political process which resulted in the formation of the Federation of Malaya (1948) from which Singapore, with its predominantly Chinese population (about 75%), was kept separate. In Borneo in 1946 the state of Sarawak, which had been a private kingdom of the English Brooke family (so-called “White Rajas”) since 1841, and North Borneo, administered by the British North Borneo Company from 1881, were both transferred to direct rule from Britain. However, independence was clearly on the horizon and in Malaya tensions continued with the guerrilla campaign (called the “Emergency”) waged by the Malayan Communist Party (membership largely Chinese) from 1948-60 to force out the British and set up a Malayan Peoples’ Republic. This failed and in 1957 the Malayan Federation gained independence (Merdeka) under a “bargain” by which the Malays would hold political paramountcy while others, notably Chinese and Indians, were given citizenship and the freedom to pursue their economic interests. The bargain was institutionalized as the Alliance, later renamed the National Front (Barisan Nasional) which remains the dominant political grouping. In 1963 the Federation of Malaysia was formed in which the bumiputera population was sufficient in total to offset the high proportion of Chinese arising from the short-lived inclusion of Singapore (Andaya and Andaya, 2001).

Towards the Formation of a National Economy

Postwar two long-term problems came to the forefront. These were (a) the political fragmentation (see above) which had long prevented a centralized approach to economic development, coupled with control from Britain which gave primacy to imperial as opposed to local interests and (b) excessive dependence on a small range of primary products (notably rubber and tin) which prewar experience had shown to be an unstable basis for the economy.

The first of these was addressed partly through the political rearrangements outlined in the previous section, with the economic aspects buttressed by a report from a mission to Malaya from the International Bank for Reconstruction and Development (IBRD) in 1954. The report argued that Malaya “is now a distinct national economy.” A further mission in 1963 urged “closer economic cooperation between the prospective Malaysia[n] territories” (cited in Drabble, 2000, 161, 176). The rationale for the Federation was that Singapore would serve as the initial center of industrialization, with Malaya, Sabah and Sarawak following at a pace determined by local conditions.

The second problem centered on economic diversification. The IBRD reports just noted advocated building up a range of secondary industries to meet a larger portion of the domestic demand for manufactures, i.e. import-substitution industrialization (ISI). In the interim dependence on primary products would perforce continue.

The Adoption of Planning

In the postwar world the development plan (usually a Five-Year Plan) was widely adopted by Less-Developed Countries (LDCs) to set directions, targets and estimated costs. Each of the Malaysian territories had plans during the 1950s. Malaya was the first to get industrialization of the ISI type under way. The Pioneer Industries Ordinance (1958) offered inducements such as five-year tax holidays, guarantees (to foreign investors) of freedom to repatriate profits and capital etc. A modest degree of tariff protection was granted. The main types of goods produced were consumer items such as batteries, paints, tires, and pharmaceuticals. Just over half the capital invested came from abroad, with neighboring Singapore in the lead. When Singapore exited the federation in 1965, Malaysia’s fledgling industrialization plans assumed greater significance although foreign investors complained of stifling bureaucracy retarding their projects.

Primary production, however, was still the major economic activity and here the problem was rejuvenation of the leading industries, rubber in particular. New capital investment in rubber had slowed since the 1920s, and the bulk of the existing trees were nearing the end of their economic life. The best prospect for rejuvenation lay in cutting down the old trees and replanting the land with new varieties capable of raising output per acre/hectare by a factor of three or four. However, the new trees required seven years to mature. Corporately owned estates could replant progressively, but smallholders could not face such a prolonged loss of income without support. To encourage replanting, the government offered grants to owners, financed by a special duty on rubber exports. The process was a lengthy one and it was the 1980s before replanting was substantially complete. Moreover, many estates elected to switch over to a new crop, oil palms (a product used primarily in foodstuffs), which offered quicker returns. Progress was swift and by the 1960s Malaysia was supplying 20 percent of world demand for this commodity.

Another priority at this time consisted of programs to improve the standard of living of the indigenous peoples, most of whom lived in the rural areas. The main instrument was land development, with schemes to open up large areas (say 100,000 acres or 40 000 hectares) which were then subdivided into 10 acre/4 hectare blocks for distribution to small farmers from overcrowded regions who were either short of land or had none at all. Financial assistance (repayable) was provided to cover housing and living costs until the holdings became productive. Rubber and oil palms were the main commercial crops planted. Steps were also taken to increase the domestic production of rice to lessen the historical dependence on imports.

In the primary sector Malaysia’s range of products was increased from the 1960s by a rapid increase in the export of hardwood timber, mostly in the form of (unprocessed) saw-logs. The markets were mainly in East Asia and Australasia. Here the largely untapped resources of Sabah and Sarawak came to the fore, but the rapid rate of exploitation led by the late twentieth century to damaging effects on both the environment (extensive deforestation, soil-loss, silting, changed weather patterns), and the traditional hunter-gatherer way of life of forest-dwellers (decrease in wild-life, fish, etc.). Other development projects such as the building of dams for hydroelectric power also had adverse consequences in all these respects (Amarjit Kaur, 1998; Drabble, 2000; Hong, 1987).

A further major addition to primary exports came from the discovery of large deposits of oil and natural gas in East Malaysia, and off the east coast of the Peninsula from the 1970s. Gas was exported in liquified form (LNG), and was also used domestically as a substitute for oil. At peak values in 1982, petroleum and LNG provided around 29 percent of Malaysian export earnings but had declined to 18 percent by 1988.

Industrialization and the New Economic Policy 1970-90

The program of industrialization aimed primarily at the domestic market (ISI) lost impetus in the late 1960s as foreign investors, particularly from Britain switched attention elsewhere. An important factor here was the outbreak of civil disturbances in May 1969, following a federal election in which political parties in the Peninsula (largely non-bumiputera in membership) opposed to the Alliance did unexpectedly well. This brought to a head tensions, which had been rising during the 1960s over issues such as the use of the national language, Malay (Bahasa Malaysia) as the main instructional medium in education. There was also discontent among Peninsular Malays that the economic fruits since independence had gone mostly to non-Malays, notably the Chinese. The outcome was severe inter-ethnic rioting centered in the federal capital, Kuala Lumpur, which led to the suspension of parliamentary government for two years and the implementation of the New Economic Policy (NEP).

The main aim of the NEP was a restructuring of the Malaysian economy over two decades, 1970-90 with the following aims:

  1. to redistribute corporate equity so that the bumiputera share would rise from around 2 percent to 30 percent. The share of other Malaysians would increase marginally from 35 to 40 percent, while that of foreigners would fall from 63 percent to 30 percent.
  2. to eliminate the close link between race and economic function (a legacy of the colonial era) and restructure employment so that that the bumiputera share in each sector would reflect more accurately their proportion of the total population (roughly 55 percent). In 1970 this group had about two-thirds of jobs in the primary sector where incomes were generally lowest, but only 30 percent in the secondary sector. In high-income middle class occupations (e.g. professions, management) the share was only 13 percent.
  3. To eradicate poverty irrespective of race. In 1970 just under half of all households in Peninsular Malaysia had incomes below the official poverty line. Malays accounted for about 75 percent of these.

The principle underlying these aims was that the redistribution would not result in any one group losing in absolute terms. Rather it would be achieved through the process of economic growth, i.e. the economy would get bigger (more investment, more jobs, etc.). While the primary sector would continue to receive developmental aid under the successive Five Year Plans, the main emphasis was a switch to export-oriented industrialization (EOI) with Malaysia seeking a share in global markets for manufactured goods. Free Trade Zones (FTZs) were set up in places such as Penang where production was carried on with the undertaking that the output would be exported. Firms locating there received concessions such as duty-free imports of raw materials and capital goods, and tax concessions, aimed at primarily at foreign investors who were also attracted by Malaysia’s good facilities, relatively low wages and docile trade unions. A range of industries grew up; textiles, rubber and food products, chemicals, telecommunications equipment, electrical and electronic machinery/appliances, car assembly and some heavy industries, iron and steel. As with ISI, much of the capital and technology was foreign, for example the Japanese firm Mitsubishi was a partner in a venture to set up a plant to assemble a Malaysian national car, the Proton, from mostly imported components (Drabble, 2000).

Results of the NEP

Table 2 below shows the outcome of the NEP in the categories outlined above.

Table 2
Restructuring under the NEP, 1970-90

1970 1990
Wealth Ownership (%) Bumiputera 2.0 20.3
Other Malaysians 34.6 54.6
Foreigners 63.4 25.1
Employment
(%) of total
workers
in each
sector
Primary sector (agriculture, mineral
extraction, forest products and fishing)
Bumiputera 67.6 [61.0]* 71.2 [36.7]*
Others 32.4 28.8
Secondary sector
(manufacturing and construction)
Bumiputera 30.8 [14.6]* 48.0 [26.3]*
Others 69.2 52.0
Tertiary sector (services) Bumiputera 37.9 [24.4]* 51.0 [36.9]*
Others 62.1 49.0

Note: [ ]* is the proportion of the ethnic group thus employed. The “others” category has not been disaggregated by race to avoid undue complexity.
Source: Drabble, 2000, Table 10.9.

Section (a) shows that, overall, foreign ownership fell substantially more than planned, while that of “Other Malaysians” rose well above the target. Bumiputera ownership appears to have stopped well short of the 30 percent mark. However, other evidence suggests that in certain sectors such as agriculture/mining (35.7%) and banking/insurance (49.7%) bumiputera ownership of shares in publicly listed companies had already attained a level well beyond the target. Section (b) indicates that while bumiputera employment share in primary production increased slightly (due mainly to the land schemes), as a proportion of that ethnic group it declined sharply, while rising markedly in both the secondary and tertiary sectors. In middle class employment the share rose to 27 percent.

As regards the proportion of households below the poverty line, in broad terms the incidence in Malaysia fell from approximately 49 percent in 1970 to 17 percent in 1990, but with large regional variations between the Peninsula (15%), Sarawak (21 %) and Sabah (34%) (Drabble, 2000, Table 13.5). All ethnic groups registered big falls, but on average the non-bumiputera still enjoyed the lowest incidence of poverty. By 2002 the overall level had fallen to only 4 percent.

The restructuring of the Malaysian economy under the NEP is very clear when we look at the changes in composition of the Gross Domestic Product (GDP) in Table 3 below.

Table 3
Structural Change in GDP 1970-90 (% shares)

Year Primary Secondary Tertiary
1970 44.3 18.3 37.4
1990 28.1 30.2 41.7

Source: Malaysian Government, 1991, Table 3-2.

Over these three decades Malaysia accomplished a transition from a primary product-dependent economy to one in which manufacturing industry had emerged as the leading growth sector. Rubber and tin, which accounted for 54.3 percent of Malaysian export value in 1970, declined sharply in relative terms to a mere 4.9 percent in 1990 (Crouch, 1996, 222).

Factors in the structural shift

The post-independence state played a leading role in the transformation. The transition from British rule was smooth. Apart from the disturbances in 1969 government maintained a firm control over the administrative machinery. Malaysia’s Five Year Development plans were a model for the developing world. Foreign capital was accorded a central role, though subject to the requirements of the NEP. At the same time these requirements discouraged domestic investors, the Chinese especially, to some extent (Jesudason, 1989).

Development was helped by major improvements in education and health. Enrolments at the primary school level reached approximately 90 percent by the 1970s, and at the secondary level 59 percent of potential by 1987. Increased female enrolments, up from 39 percent to 58 percent of potential from 1975 to 1991, were a notable feature, as was the participation of women in the workforce which rose to just over 45 percent of total employment by 1986/7. In the tertiary sector the number of universities increased from one to seven between 1969 and 1990 and numerous technical and vocational colleges opened. Bumiputera enrolments soared as a result of the NEP policy of redistribution (which included ethnic quotas and government scholarships). However, tertiary enrolments totaled only 7 percent of the age group by 1987. There was an “educational-occupation mismatch,” with graduates (bumiputera especially) preferring jobs in government, and consequent shortfalls against strong demand for engineers, research scientists, technicians and the like. Better living conditions (more homes with piped water and more rural clinics, for example) led to substantial falls in infant mortality, improved public health and longer life-expectancy, especially in Peninsular Malaysia (Drabble, 2000, 248, 284-6).

The quality of national leadership was a crucial factor. This was particularly so during the NEP. The leading figure here was Dr Mahathir Mohamad, Malaysian Prime Minister from 1981-2003. While supporting the NEP aim through positive discrimination to give bumiputera an economic stake in the country commensurate with their indigenous status and share in the population, he nevertheless emphasized that this should ultimately lead them to a more modern outlook and ability to compete with the other races in the country, the Chinese especially (see Khoo Boo Teik, 1995). There were, however, some paradoxes here. Mahathir was a meritocrat in principle, but in practice this period saw the spread of “money politics” (another expression for patronage) in Malaysia. In common with many other countries Malaysia embarked on a policy of privatization of public assets, notably in transportation (e.g. Malaysian Airlines), utilities (e.g. electricity supply) and communications (e.g. television). This was done not through an open process of competitive tendering but rather by a “nebulous ‘first come, first served’ principle” (Jomo, 1995, 8) which saw ownership pass directly to politically well-connected businessmen, mainly bumiputera, at relatively low valuations.

The New Development Policy

Positive action to promote bumiputera interests did not end with the NEP in 1990, this was followed in 1991 by the New Development Policy (NDP), which emphasized assistance only to “Bumiputera with potential, commitment and good track records” (Malaysian Government, 1991, 17) rather than the previous blanket measures to redistribute wealth and employment. In turn the NDP was part of a longer-term program known as Vision 2020. The aim here is to turn Malaysia into a fully industrialized country and to quadruple per capita income by the year 2020. This will require the country to continue ascending the technological “ladder” from low- to high-tech types of industrial production, with a corresponding increase in the intensity of capital investment and greater retention of value-added (i.e. the value added to raw materials in the production process) by Malaysian producers.

The Malaysian economy continued to boom at historically unprecedented rates of 8-9 percent a year for much of the 1990s (see next section). There was heavy expenditure on infrastructure, for example extensive building in Kuala Lumpur such as the Twin Towers (currently the highest buildings in the world). The volume of manufactured exports, notably electronic goods and electronic components increased rapidly.

Asian Financial Crisis, 1997-98

The Asian financial crisis originated in heavy international currency speculation leading to major slumps in exchange rates beginning with the Thai baht in May 1997, spreading rapidly throughout East and Southeast Asia and severely affecting the banking and finance sectors. The Malaysian ringgit exchange rate fell from RM 2.42 to 4.88 to the U.S. dollar by January 1998. There was a heavy outflow of foreign capital. To counter the crisis the International Monetary Fund (IMF) recommended austerity changes to fiscal and monetary policies. Some countries (Thailand, South Korea, and Indonesia) reluctantly adopted these. The Malaysian government refused and implemented independent measures; the ringgitbecame non-convertible externally and was pegged at RM 3.80 to the US dollar, while foreign capital repatriated before staying at least twelve months was subject to substantial levies. Despite international criticism these actions stabilized the domestic situation quite effectively, restoring net growth (see next section) especially compared to neighboring Indonesia.

Rates of Economic Growth

Malaysia’s economic growth in comparative perspective from 1960-90 is set out in Table 4 below.

Table 4
Asia-Pacific Region: Growth of Real GDP (annual average percent)

1960-69 1971-80 1981-89
Japan 10.9 5.0 4.0
Asian “Tigers”
Hong Kong 10.0 9.5 7.2
South Korea 8.5 8.7 9.3
Singapore 8.9 9.0 6.9
Taiwan 11.6 9.7 8.1
ASEAN-4
Indonesia 3.5 7.9 5.2
Malaysia 6.5 8.0 5.4
Philippines 4.9 6.2 1.7
Thailand 8.3 9.9 7.1

Source: Drabble, 2000, Table 10.2; figures for Japan are for 1960-70, 1971-80, and 1981-90.

The data show that Japan, the dominant Asian economy for much of this period, progressively slowed by the 1990s (see below). The four leading Newly Industrialized Countries (Asian “Tigers” as they were called) followed EOF strategies and achieved very high rates of growth. Among the four ASEAN (Association of Southeast Asian Nations formed 1967) members, again all adopting EOI policies, Thailand stood out followed closely by Malaysia. Reference to Table 1 above shows that by 1990 Malaysia, while still among the leaders in GDP per head, had slipped relative to the “Tigers.”

These economies, joined by China, continued growth into the 1990s at such high rates (Malaysia averaged around 8 percent a year) that the term “Asian miracle” became a common method of description. The exception was Japan which encountered major problems with structural change and an over-extended banking system. Post-crisis the countries of the region have started recovery but at differing rates. The Malaysian economy contracted by nearly 7 percent in 1998, recovered to 8 percent growth in 2000, slipped again to under 1 percent in 2001 and has since stabilized at between 4 and 5 percent growth in 2002-04.

The new Malaysian Prime Minister (since October 2003), Abdullah Ahmad Badawi, plans to shift the emphasis in development to smaller, less-costly infrastructure projects and to break the previous dominance of “money politics.” Foreign direct investment will still be sought but priority will be given to nurturing the domestic manufacturing sector.

Further improvements in education will remain a key factor (Far Eastern Economic Review, Nov.6, 2003).

Overview

Malaysia owes its successful historical economic record to a number of factors. Geographically it lies close to major world trade routes bringing early exposure to the international economy. The sparse indigenous population and labor force has been supplemented by immigrants, mainly from neighboring Asian countries with many becoming permanently domiciled. The economy has always been exceptionally open to external influences such as globalization. Foreign capital has played a major role throughout. Governments, colonial and national, have aimed at managing the structure of the economy while maintaining inter-ethnic stability. Since about 1960 the economy has benefited from extensive restructuring with sustained growth of exports from both the primary and secondary sectors, thus gaining a double impetus.

However, on a less positive assessment, the country has so far exchanged dependence on a limited range of primary products (e.g. tin and rubber) for dependence on an equally limited range of manufactured goods, notably electronics and electronic components (59 percent of exports in 2002). These industries are facing increasing competition from lower-wage countries, especially India and China. Within Malaysia the distribution of secondary industry is unbalanced, currently heavily favoring the Peninsula. Sabah and Sarawak are still heavily dependent on primary products (timber, oil, LNG). There is an urgent need to continue the search for new industries in which Malaysia can enjoy a comparative advantage in world markets, not least because inter-ethnic harmony depends heavily on the continuance of economic prosperity.

Select Bibliography

General Studies

Amarjit Kaur. Economic Change in East Malaysia: Sabah and Sarawak since 1850. London: Macmillan, 1998.

Andaya, L.Y. and Andaya, B.W. A History of Malaysia, second edition. Basingstoke: Palgrave, 2001.

Crouch, Harold. Government and Society in Malaysia. Sydney: Allen and Unwin, 1996.

Drabble, J.H. An Economic History of Malaysia, c.1800-1990: The Transition to Modern Economic Growth. Basingstoke: Macmillan and New York: St. Martin’s Press, 2000.

Furnivall, J.S. Colonial Policy and Practice: A Comparative Study of Burma and Netherlands India. Cambridge (UK), 1948.

Huff, W.G. The Economic Growth of Singapore: Trade and Development in the Twentieth Century. Cambridge: Cambridge University Press, 1994.

Jomo, K.S. Growth and Structural Change in the Malaysian Economy. London: Macmillan, 1990.

Industries/Transport

Alavi, Rokiah. Industrialization in Malaysia: Import Substitution and Infant Industry Performance. London: Routledge, 1966.

Amarjit Kaur. Bridge and Barrier: Transport and Communications in Colonial Malaya 1870-1957. Kuala Lumpur: Oxford University Press, 1985.

Drabble, J.H. Rubber in Malaya 1876-1922: The Genesis of the Industry. Kuala Lumpur: Oxford University Press, 1973.

Drabble, J.H. Malayan Rubber: The Interwar Years. London: Macmillan, 1991.

Huff, W.G. “Boom or Bust Commodities and Industrialization in Pre-World War II Malaya.” Journal of Economic History 62, no. 4 (2002): 1074-1115.

Jackson, J.C. Planters and Speculators: European and Chinese Agricultural Enterprise in Malaya 1786-1921. Kuala Lumpur: University of Malaya Press, 1968.

Lim Teck Ghee. Peasants and Their Agricultural Economy in Colonial Malaya, 1874-1941. Kuala Lumpur: Oxford University Press, 1977.

Wong Lin Ken. The Malayan Tin Industry to 1914. Tucson: University of Arizona Press, 1965.

Yip Yat Hoong. The Development of the Tin Mining Industry of Malaya. Kuala Lumpur: University of Malaya Press, 1969.

New Economic Policy

Jesudason, J.V. Ethnicity and the Economy: The State, Chinese Business and Multinationals in Malaysia. Kuala Lumpur: Oxford University Press, 1989.

Jomo, K.S., editor. Privatizing Malaysia: Rents, Rhetoric, Realities. Boulder, CO: Westview Press, 1995.

Khoo Boo Teik. Paradoxes of Mahathirism: An Intellectual Biography of Mahathir Mohamad. Kuala Lumpur: Oxford University Press, 1995.

Vincent, J.R., R.M. Ali and Associates. Environment and Development in a Resource-Rich Economy: Malaysia under the New Economic Policy. Cambridge, MA: Harvard University Press, 1997

Ethnic Communities

Chew, Daniel. Chinese Pioneers on the Sarawak Frontier, 1841-1941. Kuala Lumpur: Oxford University Press, 1990.

Gullick, J.M. Malay Society in the Late Nineteenth Century. Kuala Lumpur: Oxford University Press, 1989.

Hong, Evelyne. Natives of Sarawak: Survival in Borneo’s Vanishing Forests. Penang: Institut Masyarakat Malaysia, 1987.

Shamsul, A.B. From British to Bumiputera Rule. Singapore: Institute of Southeast Asian Studies, 1986.

Economic Growth

Far Eastern Economic Review. Hong Kong. An excellent weekly overview of current regional affairs.

Malaysian Government. The Second Outline Perspective Plan, 1991-2000. Kuala Lumpur: Government Printer, 1991.

Van der Eng, Pierre. “Assessing Economic Growth and the Standard of Living in Asia 1870-1990.” Milan, Eleventh International Economic History Congress, 1994.

Citation: Drabble, John. “The Economic History of Malaysia”. EH.Net Encyclopedia, edited by Robert Whaples. July 31, 2004. URL http://eh.net/encyclopedia/economic-history-of-malaysia/

The History of American Labor Market Institutions and Outcomes

Joshua Rosenbloom, University of Kansas

One of the most important implications of modern microeconomic theory is that perfectly competitive markets produce an efficient allocation of resources. Historically, however, most markets have not approached the level of organization of this theoretical ideal. Instead of the costless and instantaneous communication envisioned in theory, market participants must rely on a set of incomplete and often costly channels of communication to learn about conditions of supply and demand; and they may face significant transaction costs to act on the information that they have acquired through these channels.

The economic history of labor market institutions is concerned with identifying the mechanisms that have facilitated the allocation of labor effort in the economy at different times, tracing the historical processes by which they have responded to shifting circumstances, and understanding how these mechanisms affected the allocation of labor as well as the distribution of labor’s products in different epochs.

Labor market institutions include both formal organizations (such as union hiring halls, government labor exchanges, and third party intermediaries such as employment agents), and informal mechanisms of communication such as word-of-mouth about employment opportunities passed between family and friends. The impact of these institutions is broad ranging. It includes the geographic allocation of labor (migration and urbanization), decisions about education and training of workers (investment in human capital), inequality (relative wages), the allocation of time between paid work and other activities such as household production, education, and leisure, and fertility (the allocation of time between production and reproduction).

Because each worker possesses a unique bundle of skills and attributes and each job is different, labor market transactions require the communication of a relatively large amount of information. In other words, the transactions costs involved in the exchange of labor are relatively high. The result is that the barriers separating different labor markets have sometimes been quite high, and these markets are relatively poorly integrated with one another.

The frictions inherent in the labor market mean that even during macroeconomic expansions there may be both a significant number of unemployed workers and a large number of unfilled vacancies. When viewed from some distance and looked at in the long-run, however, what is most striking is how effective labor market institutions have been in adapting to the shifting patterns of supply and demand in the economy. Over the past two centuries American labor markets have accomplished a massive redistribution of labor out of agriculture into manufacturing, and then from manufacturing into services. At the same time they have accomplished a huge geographic reallocation of labor between the United States and other parts of the world as well as within the United States itself, both across states and regions and from rural locations to urban areas.

This essay is organized topically, beginning with a discussion of the evolution of institutions involved in the allocation of labor across space and then taking up the development of institutions that fostered the allocation of labor across industries and sectors. The third section considers issues related to labor market performance.

The Geographic Distribution of Labor

One of the dominant themes of American history is the process of European settlement (and the concomitant displacement of the native population). This movement of population is in essence a labor market phenomenon. From the beginning of European settlement in what became the United States, labor markets were characterized by the scarcity of labor in relation to abundant land and natural resources. Labor scarcity raised labor productivity and enabled ordinary Americans to enjoy a higher standard of living than comparable Europeans. Counterbalancing these inducements to migration, however, were the high costs of travel across the Atlantic and the significant risks posed by settlement in frontier regions. Over time, technological changes lowered the costs of communication and transportation. But exploiting these advantages required the parallel development of new labor market institutions.

Trans-Atlantic Migration in the Colonial Period

During the seventeenth and eighteenth centuries a variety of labor market institutions developed to facilitate the movement of labor in response to the opportunities created by American factor proportions. While some immigrants migrated on their own, the majority of immigrants were either indentured servants or African slaves.

Because of the cost of passage—which exceeded half a year’s income for a typical British immigrant and a full year’s income for a typical German immigrant—only a small portion of European migrants could afford to pay for their passage to the Americas (Grubb 1985a). They did so by signing contracts, or “indentures,” committing themselves to work for a fixed number of years in the future—their labor being their only viable asset—with British merchants, who then sold these contracts to colonists after their ship reached America. Indentured servitude was introduced by the Virginia Company in 1619 and appears to have arisen from a combination of the terms of two other types of labor contract widely used in England at the time: service in husbandry and apprenticeship (Galenson 1981). In other cases, migrants borrowed money for their passage and committed to repay merchants by pledging to sell themselves as servants in America, a practice known as “redemptioner servitude (Grubb 1986). Redemptioners bore increased risk because they could not predict in advance what terms they might be able to negotiate for their labor, but presumably they did so because of other benefits, such as the opportunity to choose their own master, and to select where they would be employed.

Although data on immigration for the colonial period are scattered and incomplete a number of scholars have estimated that between half and three quarters of European immigrants arriving in the colonies came as indentured or redemptioner servants. Using data for the end of the colonial period Grubb (1985b) found that close to three-quarters of English immigrants to Pennsylvania and nearly 60 percent of German immigrants arrived as servants.

A number of scholars have examined the terms of indenture and redemptioner contracts in some detail (see, e.g., Galenson 1981; Grubb 1985a). They find that consistent with the existence of a well-functioning market, the terms of service varied in response to differences in individual productivity, employment conditions, and the balance of supply and demand in different locations.

The other major source of labor for the colonies was the forced migration of African slaves. Slavery had been introduced in the West Indies at an early date, but it was not until the late seventeenth century that significant numbers of slaves began to be imported into the mainland colonies. From 1700 to 1780 the proportion of blacks in the Chesapeake region grew from 13 percent to around 40 percent. In South Carolina and Georgia, the black share of the population climbed from 18 percent to 41 percent in the same period (McCusker and Menard, 1985, p. 222). Galenson (1984) explains the transition from indentured European to enslaved African labor as the result of shifts in supply and demand conditions in England and the trans-Atlantic slave market. Conditions in Europe improved after 1650, reducing the supply of indentured servants, while at the same time increased competition in the slave trade was lowering the price of slaves (Dunn 1984). In some sense the colonies’ early experience with indentured servants paved the way for the transition to slavery. Like slaves, indentured servants were unfree, and ownership of their labor could be freely transferred from one owner to another. Unlike slaves, however, they could look forward to eventually becoming free (Morgan 1971).

Over time a marked regional division in labor market institutions emerged in colonial America. The use of slaves was concentrated in the Chesapeake and Lower South, where the presence of staple export crops (rice, indigo and tobacco) provided economic rewards for expanding the scale of cultivation beyond the size achievable with family labor. European immigrants (primarily indentured servants) tended to concentrate in the Chesapeake and Middle Colonies, where servants could expect to find the greatest opportunities to enter agriculture once they had completed their term of service. While New England was able to support self-sufficient farmers, its climate and soil were not conducive to the expansion of commercial agriculture, with the result that it attracted relatively few slaves, indentured servants, or free immigrants. These patterns are illustrated in Table 1, which summarizes the composition and destinations of English emigrants in the years 1773 to 1776.

Table 1

English Emigration to the American Colonies, by Destination and Type, 1773-76

Total Emigration
Destination Number Percentage Percent listed as servants
New England 54 1.20 1.85
Middle Colonies 1,162 25.78 61.27
New York 303 6.72 11.55
Pennsylvania 859 19.06 78.81
Chesapeake 2,984 66.21 96.28
Maryland 2,217 49.19 98.33
Virginia 767 17.02 90.35
Lower South 307 6.81 19.54
Carolinas 106 2.35 23.58
Georgia 196 4.35 17.86
Florida 5 0.11 0.00
Total 4,507 80.90

Source: Grubb (1985b, p. 334).

International Migration in the Nineteenth and Twentieth Centuries

American independence marks a turning point in the development of labor market institutions. In 1808 Congress prohibited the importation of slaves. Meanwhile, the use of indentured servitude to finance the migration of European immigrants fell into disuse. As a result, most subsequent migration was at least nominally free migration.

The high cost of migration and the economic uncertainties of the new nation help to explain the relatively low level of immigration in the early years of the nineteenth century. But as the costs of transportation fell, the volume of immigration rose dramatically over the course of the century. Transportation costs were of course only one of the obstacles to international population movements. At least as important were problems of communication. Potential migrants might know in a general way that the United States offered greater economic opportunities than were available at home, but acting on this information required the development of labor market institutions that could effectively link job-seekers with employers.

For the most part, the labor market institutions that emerged in the nineteenth century to direct international migration were “informal” and thus difficult to document. As Rosenbloom (2002, ch. 2) describes, however, word-of-mouth played an important role in labor markets at this time. Many immigrants were following in the footsteps of friends or relatives already in the United States. Often these initial pioneers provided material assistance—helping to purchase ship and train tickets, providing housing—as well as information. The consequences of this so-called “chain migration” are readily reflected in a variety of kinds of evidence. Numerous studies of specific migration streams have documented the role of a small group of initial migrants in facilitating subsequent migration (for example, Barton 1975; Kamphoefner 1987; Gjerde 1985). At a more aggregate level, settlement patterns confirm the tendency of immigrants from different countries to concentrate in different cities (Ward 1971, p. 77; Galloway, Vedder and Shukla 1974).

Informal word-of-mouth communication was an effective labor market institution because it served both employers and job-seekers. For job-seekers the recommendations of friends and relatives were more reliable than those of third parties and often came with additional assistance. For employers the recommendations of current employees served as a kind of screening mechanism, since their employees were unlikely to encourage the immigration of unreliable workers.

While chain migration can explain a quantitatively large part of the redistribution of labor in the nineteenth century it is still necessary to explain how these chains came into existence in the first place. Chain migration always coexisted with another set of more formal labor market institutions that grew up largely to serve employers who could not rely on their existing labor force to recruit new hires (such as railroad construction companies). Labor agents, often themselves immigrants, acted as intermediaries between these employers and job-seekers, providing labor market information and frequently acting as translators for immigrants who could not speak English. Steamship companies operating between Europe and the United States also employed agents to help recruit potential migrants (Rosenbloom 2002, ch. 3).

By the 1840s networks of labor agents along with boarding houses serving immigrants and other similar support networks were well established in New York, Boston, and other major immigrant destinations. The services of these agents were well documented in published guides and most Europeans considering immigration must have known that they could turn to these commercial intermediaries if they lacked friends and family to guide them. After some time working in America these immigrants, if they were successful, would find steadier employment and begin to direct subsequent migration, thus establishing a new link in the stream of chain migration.

The economic impacts of immigration are theoretically ambiguous. Increased labor supply, by itself, would tend to lower wages—benefiting employers and hurting workers. But because immigrants are also consumers, the resulting increase in demand for goods and services will increase the demand for labor, partially offsetting the depressing effect of immigration on wages. As long as the labor to capital ratio rises, however, immigration will necessarily lower wages. But if, as was true in the late nineteenth century, foreign lending follows foreign labor, then there may be no negative impact on wages (Carter and Sutch 1999). Whatever the theoretical considerations, however, immigration became an increasingly controversial political issue during the late nineteenth and early twentieth centuries. While employers and some immigrant groups supported continued immigration, there was a growing nativist sentiment among other segments of the population. Anti-immigrant sentiments appear to have arisen out of a mix of perceived economic effects and concern about the implications of the ethnic, religious and cultural differences between immigrants and the native born.

In 1882, Congress passed the Chinese Exclusion Act. Subsequent legislative efforts to impose further restrictions on immigration passed Congress but foundered on presidential vetoes. The balance of political forces shifted, however, in the wake of World War I. In 1917 a literacy requirement was imposed for the first time, and in 1921 an Emergency Quota Act was passed (Goldin 1994).

With the passage of the Emergency Quota Act in 1921 and subsequent legislation culminating in the National Origins Act, the volume of immigration dropped sharply. Since this time international migration into the United States has been controlled to varying degrees by legal restrictions. Variations in the rules have produced variations in the volume of legal immigration. Meanwhile the persistence of large wage gaps between the United States and Mexico and other developing countries has encouraged a substantial volume of illegal immigration. It remains the case, however, that most of this migration—both legal and illegal—continues to be directed by chains of friends and relatives.

Recent trends in outsourcing and off-shoring have begun to create a new channel by which lower-wage workers outside the United States can respond to the country’s high wages without physically relocating. Workers in India, China, and elsewhere possessing technical skills can now provide services such as data entry or technical support by phone and over the internet. While the novelty of this phenomenon has attracted considerable attention, the actual volume of jobs moved off-shore remains limited, and there are important obstacles to overcome before more jobs can be carried out remotely (Edwards 2004).

Internal Migration in the Nineteenth and Twentieth Centuries

At the same time that American economic development created international imbalances between labor supply and demand it also created internal disequilibrium. Fertile land and abundant natural resources drew population toward less densely settled regions in the West. Over the course of the century, advances in transportation technologies lowered the cost of shipping goods from interior regions, vastly expanding the area available for settlement. Meanwhile transportation advances and technological innovations encouraged the growth of manufacturing and fueled increased urbanization. The movement of population and economic activity from the Eastern Seaboard into the interior of the continent and from rural to urban areas in response to these incentives is an important element of U.S. economic history in the nineteenth century.

In the pre-Civil War era, the labor market response to frontier expansion differed substantially between North and South, with profound effects on patterns of settlement and regional development. Much of the cost of migration is a result of the need to gather information about opportunities in potential destinations. In the South, plantation owners could spread these costs over a relatively large number of potential migrants—i.e., their slaves. Plantations were also relatively self-sufficient, requiring little urban or commercial infrastructure to make them economically viable. Moreover, the existence of well-established markets for slaves allowed western planters to expand their labor force by purchasing additional labor from eastern plantations.

In the North, on the other hand, migration took place through the relocation of small, family farms. Fixed costs of gathering information and the risks of migration loomed larger in these farmers’ calculations than they did for slaveholders, and they were more dependent on the presence of urban merchants to supply them with inputs and market their products. Consequently the task of mobilizing labor fell to promoters who bought up large tracts of land at low prices and then subdivided them into individual lots. To increase the value of these lands promoters offered loans, actively encourage the development of urban services such as blacksmith shops, grain merchants, wagon builders and general stores, and recruited settlers. With the spread of railroads, railroad construction companies also played a role in encouraging settlement along their routes to speed the development of traffic.

The differences in processes of westward migration in the North and South were reflected in the divergence of rates of urbanization, transportation infrastructure investment, manufacturing employment, and population density, all of which were higher in the North than in the South in 1860 (Wright 1986, pp. 19-29).

The Distribution of Labor among Economic Activities

Over the course of U.S. economic development technological changes and shifting consumption patterns have caused the demand for labor to increase in manufacturing and services and decline in agriculture and other extractive activities. These broad changes are illustrated in Table 2. As technological changes have increased the advantages of specialization and the division of labor, more and more economic activity has moved outside the scope of the household, and the boundaries of the labor market have been enlarged. As a result more and more women have moved into the paid labor force. On the other hand, with the increasing importance of formal education, there has been a decline in the number of children in the labor force (Whaples 2005).

Table 2

Sectoral Distribution of the Labor Force, 1800-1999

Share in
Non-Agriculture
Year Total Labor Force (1000s) Agriculture Total Manufacturing Services
1800 1,658 76.2 23.8
1850 8,199 53.6 46.4
1900 29,031 37.5 59.4 35.8 23.6
1950 57,860 11.9 88.1 41.0 47.1
1999 133,489 2.3 97.7 24.7 73.0

Notes and Sources: 1800 and 1850 from Weiss (1986), pp. 646-49; remaining years from Hughes and Cain (2003), 547-48. For 1900-1999 Forestry and Fishing are included in the Agricultural labor force.

As these changes have taken place they have placed strains on existing labor market institutions and encouraged the development of new mechanisms to facilitate the distribution of labor. Over the course of the last century and a half the tendency has been a movement away from something approximating a “spot” market characterized by short-term employment relationships in which wages are equated to the marginal product of labor, and toward a much more complex and rule-bound set of long-term transactions (Goldin 2000, p. 586) While certain segments of the labor market still involve relatively anonymous and short-lived transactions, workers and employers are much more likely today to enter into long-term employment relationships that are expected to last for many years.

The evolution of labor market institutions in response to these shifting demands has been anything but smooth. During the late nineteenth century the expansion of organized labor was accompanied by often violent labor-management conflict (Friedman 2002). Not until the New Deal did unions gain widespread acceptance and a legal right to bargain. Yet even today, union organizing efforts are often met with considerable hostility.

Conflicts over union organizing efforts inevitably involved state and federal governments because the legal environment directly affected the bargaining power of both sides, and shifting legal opinions and legislative changes played an important part in determining the outcome of these contests. State and federal governments were also drawn into labor markets as various groups sought to limit hours of work, set minimum wages, provide support for disabled workers, and respond to other perceived shortcomings of existing arrangements. It would be wrong, however, to see the growth of government regulation as simply a movement from freer to more regulated markets. The ability to exchange goods and services rests ultimately on the legal system, and to this extent there has never been an entirely unregulated market. In addition, labor market transactions are never as simple as the anonymous exchange of other goods or services. Because the identities of individual buyers and sellers matter and the long-term nature of many employment relationships, adjustments can occur along other margins besides wages, and many of these dimensions involve externalities that affect all workers at a particular establishment, or possibly workers in an entire industry or sector.

Government regulations have responded in many cases to needs voiced by participants on both sides of the labor market for assistance to achieve desired ends. That has not, of course, prevented both workers and employers from seeking to use government to alter the way in which the gains from trade are distributed within the market.

The Agricultural Labor Market

At the beginning of the nineteenth century most labor was employed in agriculture, and, with the exception of large slave plantations, most agricultural labor was performed on small, family-run farms. There were markets for temporary and seasonal agricultural laborers to supplement family labor supply, but in most parts of the country outside the South, families remained the dominant institution directing the allocation of farm labor. Reliable estimates of the number of farm workers are not readily available before 1860, when the federal Census first enumerated “farm laborers.” At this time census enumerators found about 800 thousand such workers, implying an average of less than one-half farm worker per farm. Interpretation of this figure is complicated, however, and it may either overstate the amount of hired help—since farm laborers included unpaid family workers—or understate it—since it excluded those who reported their occupation simply as “laborer” and may have spent some of their time working in agriculture (Wright 1988, p. 193). A possibly more reliable indicator is provided by the percentage of gross value of farm output spent on wage labor. This figure fell from 11.4 percent in 1870 to around 8 percent by 1900, indicating that hired labor was on average becoming even less important (Wright 1988, pp. 194-95).

In the South, after the Civil War, arrangements were more complicated. Former plantation owners continued to own large tracts of land that required labor if they were to be made productive. Meanwhile former slaves needed access to land and capital if they were to support themselves. While some land owners turned to wage labor to work their land, most relied heavily on institutions like sharecropping. On the supply side, croppers viewed this form of employment as a rung on the “agricultural ladder” that would lead eventually to tenancy and possibly ownership. Because climbing the agricultural ladder meant establishing one’s credit-worthiness with local lenders, southern farm laborers tended to sort themselves into two categories: locally established (mostly older, married men) croppers and renters on the one hand, and mobile wage laborers (mostly younger and unmarried) on the other. While the labor market for each of these types of workers appears to have been relatively competitive, the barriers between the two markets remained relatively high (Wright 1987, p. 111).

While the predominant pattern in agriculture then was one of small, family-operated units, there was an important countervailing trend toward specialization that both depended on, and encouraged the emergence of a more specialized market for farm labor. Because specialization in a single crop increased the seasonality of labor demand, farmers could not afford to employ labor year-round, but had to depend on migrant workers. The use of seasonal gangs of migrant wage laborers developed earliest in California in the 1870s and 1880s, where employers relied heavily on Chinese immigrants. Following restrictions on Chinese entry, they were replaced first by Japanese, and later by Mexican workers (Wright 1988, pp. 201-204).

The Emergence of Internal Labor Markets

Outside of agriculture, at the beginning of the nineteenth century most manufacturing took place in small establishments. 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 1931). 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 1870s of the problem of unemployment. During the depression of 1873 for the first time cities throughout the country had to contend with large masses of industrial workers thrown out of work and unable to support themselves through, in the language of the time, “no fault of their own” (Keyssar 1986, ch. 2).

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 1975, pp. 34-54). 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, 2004). 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 1988; Carter and Savocca 1990; Jacoby and Sharma 1992; James 1994).

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 implementation of these reforms did not make significant headway, however, until the 1920s (Slichter 1929). Why employers began to establish internal labor markets in the 1920s remains in dispute. While some scholars emphasize pressure from workers (Jacoby 1984; 1985) others have stressed that it was largely a response to the rising costs of labor turnover (Edwards 1979).

The Government and the Labor Market

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 1984). 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 2002). Unionization efforts, however, met strong opposition from employers, and suffered from the obstacles created by the American legal system’s bias toward protecting property and the freedom of contract. 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 1910s 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 1911; 13 more had joined the bandwagon by 1913, and by 1920 44 states had such legislation (Fishback 2001).

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 1916, but this law was found unconstitutional in 1916 (Goldin 2000, p. 612-13).

The economic crisis of the 1930s triggered a new wave of government interventions in the labor market. During the 1930s 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.

In 1933 the National Industrial Recovery Act included provisions legalizing unions’ right to bargain collectively. Although the NIRA was eventually ruled to be unconstitutional, the key labor provisions of the Act were reinstated in the Wagner Act of 1935. While some of the provisions of the Wagner Act were modified in 1947 by the Taft-Hartley Act, its passage marks the beginning of the golden age of organized labor. Union membership jumped very quickly after 1935 from around 12 percent of the non-agricultural labor force to nearly 30 percent, and by the late 1940s had attained a peak of 35 percent, where it stabilized. Since the 1960s, however, union membership has declined steadily, to the point where it is now back at pre-Wagner Act levels.

The Social Security Act of 1935 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 1938, 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 1964 with passage of the Civil Rights Act, which prohibited employment discrimination against both minorities and women. In 1967 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. The Family and Medical Leave Act of 1994 allows for unpaid leave to care for infants, children and other sick relatives (Goldin 2000, p. 614).

Whether state and federal legislation has significantly affected labor market outcomes remains unclear. Most economists would argue that the majority of labor’s gains in the past century would have occurred even in the absence of government intervention. Rather than shaping market outcomes, many legislative initiatives emerged as a result of underlying changes that were making advances possible. According to Claudia Goldin (2000, p. 553) “government intervention often reinforced existing trends, as in the decline of child labor, the narrowing of the wage structure, and the decrease in hours of work.” In other cases, such as Workers Compensation and pensions, legislation helped to establish the basis for markets.

The Changing Boundaries of the Labor Market

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 1993, ch. 4). 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 1990, p. 119-20). Children, on the other hand, were often viewed as supplementary earners in blue-collar households at this time.

Since 1900 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 2005). 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.S. economy (Goldin 2000, p. 609-12).

Assessing the Efficiency of Labor Market Institutions

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.

Long-Run Efficiency and Wage Gaps

Efforts to evaluate the efficiency of market allocation begin with what is commonly know as the “law of one price,” which states that within an efficient market the wage of similar workers doing similar work under similar circumstances should be equalized. 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. By the 1840s, however, vast improvements in shipping cut the costs of migration, and gave rise to an era of dramatic international wage equalization (O’Rourke and Williamson 1999, ch. 2; Williamson 1995). 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 1880s, 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. From World War II until about 1980, European wage levels once again began to converge toward the U.S., but this convergence reflected largely internally-generated improvements in European living standards rather then labor market pressures.

Figure 1

Relative Real Wages of Selected European Countries, 1830-1980 (US = 100)

Source: Williamson (1995), Tables A2.1-A2.3.

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 1820 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 1820s (Margo 2000a, ch. 5). Thereafter, wage gaps declined substantially, falling to the 10-20 percent range before the Civil War. Despite some temporary divergence during the war, wage gaps had fallen to 5 to 10 percent by the 1880s and 1890s. 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.

Figure 2

Relative Regional Real Wage Rates in the United States, 1825-1984

(Northeast = 100 in each year)

Notes and sources: Rosenbloom (2002, p. 133); Montgomery (1992). 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 (2000); Sundstrom and Rosenbloom (1993) and Coelho and Shepherd (1976) are all based on occupational wage rates from payroll records for specific occupations; Rosenbloom (1996) uses average earnings across all manufacturing workers; while Montgomery (1992) 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 (1992) 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 1920s created a basis for future chain migration, but the Great Depression of the 1930s interrupted this process of adjustment. Not until the 1940s did the North-South wage gap begin to decline substantially (Wright 1986, pp. 71-80). By the 1970s 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 1971; Bellante 1979; Sahling and Smith 1983; Montgomery 1992). Despite these shocks, however, the overall variation in wages appears comparable to levels attained by the end of the nineteenth century. Montgomery (1992), for example finds that from 1974 to 1984 the standard deviation of wages across SMSAs was only about 10 percent of the average wage.

Table 3

Net Migration by Region, and Race, 1870-1950

South Northeast North Central West
Period White Black White Black White Black White Black
Number (in 1,000s)
1870-80 91 -68 -374 26 26 42 257 0
1880-90 -271 -88 -240 61 -43 28 554 0
1890-00 -30 -185 101 136 -445 49 374 0
1900-10 -69 -194 -196 109 -1,110 63 1,375 22
1910-20 -663 -555 -74 242 -145 281 880 32
1920-30 -704 -903 -177 435 -464 426 1,345 42
1930-40 -558 -480 55 273 -747 152 1,250 55
1940-50 -866 -1581 -659 599 -1,296 626 2,822 356
Rate (migrants/1,000 Population)
1870-80 11 -14 -33 55 2 124 274 0
1880-90 -26 -15 -18 107 -3 65 325 0
1890-00 -2 -26 6 200 -23 104 141 0
1900-10 -4 -24 -11 137 -48 122 329 542
1910-20 -33 -66 -3 254 -5 421 143 491
1920-30 -30 -103 -7 328 -15 415 160 421
1930-40 -20 -52 2 157 -22 113 116 378
1940-50 -28 -167 -20 259 -35 344 195 964

Note: Net migration is calculated as the difference between the actual increase in population over each decade and the predicted increase based on age and sex specific mortality rates and the demographic structure of the region’s population at the beginning of the decade. 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. The states included in the Southern region are Oklahoma, Texas, Arkansas, Louisiana, Mississippi, Alabama, Tennessee, Kentucky, West Virginia, Virginia, North Carolina, South Carolina, Georgia, and Florida.

Source: Eldridge and Thomas (1964, pp. 90, 99).

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.S. economic history.

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 1988, pp. 204-5). Margo (2000, ch. 4) offers evidence of a high degree of equalization within local labor markets between farm and urban wages as early as 1860. 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 1930s, Hatton and Williamson (1991) find that farm and city wages were nearly equal within U.S. regions by the 1890s. 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 1991).

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 1940, full-time black male workers earned only about 43 percent of what white male full-time workers did. By 1980 the racial pay ratio had risen to nearly 73 percent, but there has been little subsequent progress. Until the mid-1960s 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 1995; Smith and Welch 1990). 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 1986, pp. 127-34). But the episodic nature of black wage gains, especially after 1964 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 1991).

Table 4

Black Male Wages as a Percentage of White Male Wages, 1940-2004

Date Black Relative Wage
1940 43.4
1950 55.2
1960 57.5
1970 64.4
1980 72.6
1990 70.0
2004 77.0

Notes and Sources: Data for 1940 through 1980 are based on Census data as reported in Smith and Welch (1989, Table 8). Data for 1990 are from Ehrenberg and Smith (2000, Table 12.4) and refer to earnings of full time, full year workers. Data from 2004 are for median weekly earnings of full-time wage and salary workers derived from data in the Current Population Survey accessed on-line from the Bureau of Labor Statistic on 13 December 2005; URL ftp://ftp.bls.gov/pub/special.requests/lf/aat37.txt.

Male-Female wage gaps have also narrowed substantially over time. In the 1820s women’s earnings in manufacturing were a little less than 40 percent of those of men, but this ratio rose over time reaching about 55 percent by the 1920s. Across all sectors women’s relative pay rose during the first half of the twentieth century, but gains in female wages stalled during the 1950s and 1960s at the time when female labor force participation began to increase rapidly. Beginning in the late 1970s or early 1980s, relative female pay began to rise again, and today women earn about 80 percent what men do (Goldin 1990, table 3.2; Goldin 2000, pp. 606-8). 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 (1987) 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 Response to Short-run Macroeconomic Fluctuations

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 1870s. 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 1940. 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. Estimates prepared by Stanley Lebergott (1964) suggest that the average level of unemployment and its volatility have declined between the pre-1930 and post-World War II periods. Christina Romer (1986a, 1986b), however, has argued that there was no decline in volatility. Rather, she argues that the apparent change in behavior is the result of Lebergott’s interpolation procedure.

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 2000, pp. 591-97). At the beginning of the twentieth century, unemployment was relatively widespread, and largely unrelated to personal characteristics. Thus many employees faced great uncertainty about the permanence of their employment relationship. Today, on the other hand, unemployment is highly concentrated: falling heavily on the least skilled, the youngest, and the non-white segments of the labor force. Thus, the movement away from spot markets has tended to create a two-tier labor market in which some workers are highly vulnerable to economic fluctuations, while others remain largely insulated from economic shocks.

Wage Determination and Distributional Issues

American economic growth has generated vast increases in the material standard of living. Real gross domestic product per capita, for example, has increased more than twenty-fold since 1820 (Steckel 2002). This growth in total output has in large part been passed on to labor in the form of higher wages. Although labor’s share of national output has fluctuated somewhat, in the long-run it has remained surprisingly stable. According to Abramovitz and David (2000, p. 20), labor received 65 percent of national income in the years 1800-1855. Labor’s share dropped in the late nineteenth and early twentieth centuries, falling to a low of 54 percent of national income between 1890 and 1927, but has since risen, reaching 65 percent again in 1966-1989. Thus, over the long term, labor income has grown at the same rate as total output in the economy.

The distribution of labor’s gains across different groups in the labor force has also varied over time. I have already discussed patterns of wage variation by race and gender, but another important issue revolves around the overall level of inequality of pay, and differences in pay between groups of skilled and unskilled workers. Careful research by Picketty and Saez (2003) using individual income tax returns has documented changes in the overall distribution of income in the United States since 1913. They find that inequality has followed a U-shaped pattern over the course of the twentieth century. Inequality was relatively high at the beginning of the period they consider, fell sharply during World War II, held steady until the early 1970s and then began to increase, reaching levels comparable to those in the early twentieth century by the 1990s.

An important factor in the rising inequality of income since 1970 has been growing dispersion in wage rates. The wage differential between workers in the 90th percentile of the wage distribution and those in the 10th percentile increased by 49 percent between 1969 and 1995 (Plotnick et al 2000, pp. 357-58). These shifts are mirrored in increased premiums earned by college graduates relative to high school graduates. Two primary explanations have been advanced for these trends. First, there is evidence that technological changes—especially those associated with the increased use of information technology—has increased relative demand for more educated workers (Murnane, Willett and Levy (1995). Second, increased global integration has allowed low-wage manufacturing industries overseas to compete more effectively with U.S. manufacturers, thus depressing wages in what have traditionally been high-paying blue collar jobs.

Efforts to expand the scope of analysis over a longer-run encounter problems with more limited data. Based on selected wage ratios of skilled and unskilled workers Willamson and Lindert (1980) have argued that there was an increase in wage inequality over the course of the nineteenth century. But other scholars have argued that the wage series that Williamson and Lindert used are unreliable (Margo 2000b, pp. 224-28).

Conclusions

The history of labor market institutions in the United States illustrates the point that real world economies are substantially more complex than the simplest textbook models. Instead of a disinterested and omniscient auctioneer, the process of matching buyers and sellers takes place through the actions of self-interested market participants. The resulting labor market institutions do not respond immediately and precisely to shifting patterns of incentives. Rather they are subject to historical forces of increasing-returns and lock-in that cause them to change gradually and along path-dependent trajectories.

For all of these departures from the theoretically ideal market, however, the history of labor markets in the United States can also be seen as a confirmation of the remarkable power of market processes of allocation. From the beginning of European settlement in mainland North America, labor markets have done a remarkable job of responding to shifting patterns of demand and supply. Not only have they accomplished the massive geographic shifts associated with the settlement of the United States, but they have also dealt with huge structural changes induced by the sustained pace of technological change.

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A Brief Economic History of Modern Israel

Nadav Halevi, Hebrew University

The Pre-state Background

The history of modern Israel begins in the 1880s, when the first Zionist immigrants came to Palestine, then under Ottoman rule, to join the small existing Jewish community, establishing agricultural settlements and some industry, restoring Hebrew as the spoken national language, and creating new economic and social institutions. The ravages of World War I reduced the Jewish population by a third, to 56,000, about what it had been at the beginning of the century.

As a result of the war, Palestine came under the control of Great Britain, whose Balfour Declaration had called for a Jewish National Home in Palestine. Britain’s control was formalized in 1920, when it was given the Mandate for Palestine by the League of Nations. During the Mandatory period, which lasted until May 1948, the social, political and economic structure for the future state of Israel was developed. Though the government of Palestine had a single economic policy, the Jewish and Arab economies developed separately, with relatively little connection.

Two factors were instrumental in fostering rapid economic growth of the Jewish sector: immigration and capital inflows. The Jewish population increased mainly through immigration; by the end of 1947 it had reached 630,000, about 35 percent of the total population. Immigrants came in waves, particularly large in the mid 1920s and mid 1930s. They consisted of ideological Zionists and refugees, economic and political, from Central and Eastern Europe. Capital inflows included public funds, collected by Zionist institutions, but were for the most part private funds. National product grew rapidly during periods of large immigration, but both waves of mass immigration were followed by recessions, periods of adjustment and consolidation.

In the period from 1922 to 1947 real net domestic product (NDP) of the Jewish sector grew at an average rate of 13.2 percent, and in 1947 accounted for 54 percent of the NDP of the Jewish and Arab economies together. NDP per capita in the Jewish sector grew at a rate of 4.8 percent; by the end of the period it was 8.5 times larger in than in 1922, and 2.5 times larger than in the Arab sector (Metzer, 1998). Though agricultural development – an ideological objective – was substantial, this sector never accounted for more than 15 percent of total net domestic product of the Jewish economy. Manufacturing grew slowly for most of the period, but very rapidly during World War II, when Palestine was cut off from foreign competition and was a major provider to the British armed forces in the Middle East. By the end of the period, manufacturing accounted for a quarter of NDP. Housing construction, though a smaller component of NDP, was the most volatile sector, and contributed to sharp business cycle movements. A salient feature of the Jewish economy during the Mandatory period, which carried over into later periods, was the dominant size of the services sector – more than half of total NDP. This included a relatively modern educational and health sector, efficient financial and business sectors, and semi-governmental Jewish institutions, which later were ready to take on governmental duties.

The Formative Years: 1948-1965

The state of Israel came into being, in mid May 1948, in the midst of a war with its Arab neighbors. The immediate economic problems were formidable: to finance and wage a war, to take in as many immigrants as possible (first the refugees kept in camps in Europe and on Cyprus), to provide basic commodities to the old and new population, and to create a government bureaucracy to cope with all these challenges. The creation of a government went relatively smoothly, as semi-governmental Jewish institutions which had developed during the Mandatory period now became government departments.

Cease-fire agreements were signed during 1949. By the end of that year a total of 340,000 immigrants had arrived, and by the end of 1951 an additional 345,000 (the latter including immigrants from Arab countries), thus doubling the Jewish population. Immediate needs were met by a strict austerity program and inflationary government finance, repressed by price controls and rationing of basic commodities. However, the problems of providing housing and employment for the new population were solved only gradually. A New Economic Policy was introduced in early 1952. It consisted of exchange rate devaluation, the gradual relaxation of price controls and rationing, and curbing of monetary expansion, primarily by budgetary restraint. Active immigration encouragement was curtailed, to await the absorption of the earlier mass immigration.

From 1950 until 1965, Israel achieved a high rate of growth: Real GNP (gross national product) grew by an average annual rate of over 11 percent, and per capita GNP by greater than 6 percent. What made this possible? Israel was fortunate in receiving large sums of capital inflows: U.S. aid in the forms of unilateral transfers and loans, German reparations and restitutions to individuals, sale of State of Israel Bonds abroad, and unilateral transfers to public institutions, mainly the Jewish Agency, which retained responsibility for immigration absorption and agricultural settlement. Thus, Israel had resources available for domestic use – for public and private consumption and investment – about 25 percent more than its own GNP. This made possible a massive investment program, mainly financed through a special government budget. Both the enormity of needs and the socialist philosophy of the main political party in the government coalitions led to extreme government intervention in the economy.

Governmental budgets and strong protectionist measures to foster import-substitution enabled the development of new industries, chief among them textiles, and subsidies were given to help the development of exports, additional to the traditional exports of citrus products and cut diamonds.

During the four decades from the mid 1960s until the present, Israel’s economy developed and changed, as did economic policy. A major factor affecting these developments has been the Arab-Israeli conflict. Its influence is discussed first, and is followed by brief descriptions of economic growth and fluctuations, and evolution of economic policy.

The Arab-Israel Conflict

The most dramatic event of the 1960s was the Six Day War of 1967, at the end of which Israel controlled the West Bank (of the Jordan River) – the area of Palestine absorbed by the Jordan since 1949 – and the Gaza Strip, controlled until then by Egypt.

As a consequence of the occupation of these territories Israel was responsible for the economic as well as the political life in the areas taken over. The Arab sections of Jerusalem were united with the Jewish section. Jewish settlements were established in parts of the occupied territories. As hostilities intensified, special investments in infrastructure were made to protect Jewish settlers. The allocation of resources to Jewish settlements in the occupied territories has been a political and economic issue ever since.

The economies of Israel and the occupied territories were partially integrated. Trade in goods and services developed, with restrictions placed on exports to Israel of products deemed too competitive, and Palestinian workers were employed in Israel particularly in construction and agriculture. At its peak, in 1996, Palestinian employment in Israel reached 115,000 to 120,000, about 40 percent of the Palestinian labor force, but never more than 6.5 percent of total Israeli employment. Thus, while employment in Israel was a major contributor to the economy of the Palestinians, its effects on the Israeli economy, except for the sectors of construction and agriculture, were not large.

The Palestinian economy developed rapidly – real per capita national income grew at an annual rate of close to 20 percent in 1969-1972 and 5 percent in 1973-1980 – but fluctuated widely thereafter, and actually decreased in times of hostilities. Palestinian per capita income equaled 10.2 percent of Israeli per capita income in 1968, 22.8 percent in 1986, and declined to 9.7 percent in 1998 (Kleiman, 2003).

As part of the peace process between Israel and the Palestinians initiated in the 1990s, an economic agreement was signed between the parties in 1994, which in effect transformed what had been essentially a one-sided customs agreement (which gave Israel full freedom to export to the Territories but put restrictions on Palestinian exports to Israel) into a more equal customs union: the uniform external trade policy was actually Israel’s, but the Palestinians were given limited sovereignty regarding imports of certain commodities.

Arab uprisings (intifadas), in the 1980s, and especially the more violent one beginning in 2000 and continuing into 2005, led to severe Israeli restrictions on interaction between the two economies, particularly employment of Palestinians in Israel, and even to military reoccupation of some areas given over earlier to Palestinian control. These measures set the Palestinian economy back many years, wiping out much of the gains in income which had been achieved since 1967 – per capita GNP in 2004 was $932, compared to about $1500 in 1999. Palestinian workers in Israel were replaced by foreign workers.

An important economic implication of the Arab-Israel conflict is that Israel must allocate a major part of its budget to defense. The size of the defense budget has varied, rising during wars and armed hostilities. The total defense burden (including expenses not in the budget) reached its maximum relative size during and after the Yom Kippur War of 1973, close to 30 percent of GNP in 1974-1978. In the 2000-2004 period, the defense budget alone reached about 22 to 25 percent of GDP. Israel has been fortunate in receiving generous amounts of U.S. aid. Until 1972 most of this came in the form of grants and loans, primarily for purchases of U.S. agricultural surpluses. But since 1973 U.S. aid has been closely connected to Israel’s defense needs. During 1973-1982 annual loans and grants averaged $1.9 billion, and covered some 60 percent of total defense imports. But even in more tranquil periods, the defense burden, exclusive of U.S. aid, has been much larger than usual in industrial countries during peace time.

Growth and Economic Fluctuations

The high rates of growth of income and income per capita which characterized Israel until 1973 were not achieved thereafter. GDP growth fluctuated, generally between 2 and 5 percent, reaching as high as 7.5 percent in 2000, but falling below zero in the recession years from 2001 to mid 2003. By the end of the twentieth century income per capita reached about $20,000, similar to many of the more developed industrialized countries.

Economic fluctuations in Israel have usually been associated with waves of immigration: a large flow of immigrants which abruptly increases the population requires an adjustment period until it is absorbed productively, with the investments for its absorption in employment and housing stimulating economic activity. Immigration never again reached the relative size of the first years after statehood, but again gained importance with the loosening of restrictions on emigration from the Soviet Union. The total number of immigrants in 1972-1982 was 325,000, and after the collapse of the Soviet Union immigration totaled 1,050,000 in 1990-1999, mostly from the former Soviet Union. Unlike the earlier period, these immigrants were gradually absorbed in productive employment (though often not in the same activity as abroad) without resort to make-work projects. By the end of the century the population of Israel passed 6,300,000, with the Jewish population being 78 percent of the total. The immigrants from the former Soviet Union were equal to about one-fifth of the Jewish population, and were a significant and important addition of human capital to the labor force.

As the economy developed, the structure of output changed. Though the service sectors are still relatively large – trade and services contributing 46 percent of the business sector’s product – agriculture has declined in importance, and industry makes up over a quarter of the total. The structure of manufacturing has also changed: both in total production and in exports the share of traditional, low-tech industries has declined, with sophisticated, high-tech products, particularly electronics, achieving primary importance.

Fluctuations in output were marked by periods of inflation and periods of unemployment. After a change in exchange rate policy in the late 1970s (discussed below), an inflationary spiral was unleashed. Hyperinflation rates were reached in the early 1980s, about 400 percent per year by the time a drastic stabilization policy was imposed in 1985. Exchange rate stabilization, budgetary and monetary restraint, and wage and price freezes sharply reduced the rate of inflation to less than 20 percent, and then to about 16 percent in the late 1980s. Very drastic monetary policy, from the late 1990s, finally reduced the inflation to zero by 2005. However, this policy, combined with external factors such as the bursting of the high-tech bubble, recession abroad, and domestic insecurity resulting from the intifada, led to unemployment levels above 10 percent at the beginning of the new century. The economic improvements since the latter half of 2003 have, as yet (February 2005), not significantly reduced the level of unemployment.

Policy Changes

The Israeli economy was initially subject to extensive government controls. Only gradually was the economy converted into a fairly free (though still not completely so) market economy. This process began in the 1960s. In response to a realization by policy makers that government intervention in the economy was excessive, and to the challenge posed by the creation in Europe of a customs union (which gradually progressed into the present European Union), Israel embarked upon a very gradual process of economic liberalization. This appeared first in foreign trade: quantitative restrictions on imports were replaced by tariff protection, which was slowly reduced, and both import-substitution and exports were encouraged by more realistic exchange rates rather than by protection and subsidies. Several partial trade agreements with the European Economic Community (EEC), starting in 1964, culminated in a free trade area agreement (FTA) in industrial goods in 1975, and an FTA agreement with the U.S. came into force in 1985.

By late 1977 a considerable degree of trade liberalization had taken place. In October of that year, Israel moved from a fixed exchange rate system to a floating rate system, and restrictions on capital movements were considerably liberalized. However, there followed a disastrous inflationary spiral which curbed the capital liberalization process. Capital flows were not completely liberalized until the beginning of the new century.

Throughout the 1980s and the 1990s there were additional liberalization measures: in monetary policy, in domestic capital markets, and in various instruments of governmental interference in economic activity. The role of government in the economy was considerably decreased. On the other hand, some governmental economic functions were increased: a national health insurance system was introduced, though private health providers continued to provide health services within the national system. Social welfare payments, such as unemployment benefits, child allowances, old age pensions and minimum income support, were expanded continuously, until they formed a major budgetary expenditure. These transfer payments compensated, to a large extent, for the continuous growth of income inequality, which had moved Israel from among the developed countries with the least income inequality to those with the most. By 2003, 15 percent of the government’s budget went to health services, 15 percent to education, and an additional 20 percent were transfer payments through the National Insurance Agency.

Beginning in 2003, the Ministry of Finance embarked upon a major effort to decrease welfare payments, induce greater participation in the labor force, privatize enterprises still owned by government, and reduce both the relative size of the government deficit and the government sector itself. These activities are the result of an ideological acceptance by the present policy makers of the concept that a truly free market economy is needed to fit into and compete in the modern world of globalization.

An important economic institution is the Histadrut, a federation of labor unions. What had made this institution unique is that, in addition to normal labor union functions, it encompassed agricultural and other cooperatives, major construction and industrial enterprises, and social welfare institutions, including the main health care provider. During the Mandatory period, and for many years thereafter, the Histadrut was an important factor in economic development and in influencing economic policy. During the 1990s, the Histadrut was divested of many of its non-union activities, and its influence in the economy has greatly declined. The major unions associated with it still have much say in wage and employment issues.

The Challenges Ahead

As it moves into the new century, the Israeli economy has proven to be prosperous, as it continuously introduces and applies economic innovation, and to be capable of dealing with economic fluctuations. However, it faces some serious challenges. Some of these are the same as those faced by most industrial economies: how to reconcile innovation, the switch from traditional activities which are no longer competitive, to more sophisticated, skill-intensive products, with the dislocation of labor it involves, and the income inequality it intensifies. Like other small economies, Israel has to see how it fits into the new global economy, marked by the two major markets of the EU and the U.S., and the emergence of China as a major economic factor.

Special issues relate to the relations of Israel with its Arab neighbors. First are the financial implications of continuous hostilities and military threats. Clearly, if peace can come to the region, resources can be transferred to more productive uses. Furthermore, foreign investment, so important for Israel’s future growth, is very responsive to political security. Other issues depend on the type of relations established: will there be the free movement of goods and workers between Israel and a Palestinian state? Will relatively free economic relations with other Arab countries lead to a greater integration of Israel in the immediate region, or, as is more likely, will Israel’s trade orientation continue to be directed mainly to the present major industrial countries? If the latter proves true, Israel will have to carefully maneuver between the two giants: the U.S. and the EU.

References and Recommended Reading

Ben-Bassat, Avi, editor. The Israeli Economy, 1985-1998: From Government Intervention to Market Economics. Cambridge, MA: MIT Press, 2002.

Ben-Porath, Yoram, editor. The Israeli Economy: Maturing through Crisis. Cambridge, MA: Harvard University Press, 1986.

Fischer, Stanley, Dani Rodrik and Elias Tuma, editors. The Economics of Middle East Peace. Cambridge, MA: MIT Press, 1993.

Halevi, Nadav and Ruth Klinov-Malul, The Economic Development of Israel. New York: Praeger, 1968.

Kleiman, Ephraim. “Palestinian Economic Viability and Vulnerability.” Paper presented at the UCLA Burkle Conference in Athens, August 2003. (Available at www.international.ucla.edu.)

Metz, Helen Chapin, editor. Israel: A Country Study. Washington: Library of Congress Country Studies, 1986.

Metzer, Jacob, The Divided Economy of Mandatory Palestine. Cambridge: Cambridge University Press, 1998.

Patinkin, Don. The Israel Economy: The First Decade. Jerusalem: Maurice Falk Institute for Economic Research in Israel, 1967.

Razin, Assaf and Efraim Sadka, The Economy of Modern Israel: Malaise and Promise. London: Chicago University Press, 1993.

World Bank. Developing the Occupied Territories: An Investment in Peace. Washington D.C.: The World Bank, September, 1993.

Citation: Halevi, Nadav. “A Brief Economic History of Modern Israel”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/a-brief-economic-history-of-modern-israel/

Immigration to the United States

Raymond L. Cohn, Illinois State University (Emeritus)

For good reason, it is often said the United States is a nation of immigrants. Almost every person in the United States is descended from someone who arrived from another country. This article discusses immigration to the United States from colonial times to the present. The focus is on individuals who paid their own way, rather than slaves and indentured servants. Various issues concerning immigration are discussed: (1) the basic data sources available, (2) the variation in the volume over time, (3) the reasons immigration occurred, (4) nativism and U.S. immigration policy, (5) the characteristics of the immigrant stream, (6) the effects on the United States economy, and (7) the experience of immigrants in the U.S. labor market.

For readers who wish to further investigate immigration, the following works listed in the Reference section of this entry are recommended as general histories of immigration to the United States: Hansen (1940); Jones (1960); Walker (1964); Taylor (1971); Miller (1985); Nugent (1992); Erickson (1994); Hatton and Williamson (1998); and Cohn (2009).

The Available Data Sources

The primary source of data on immigration to the United States is the Passenger Lists, though U.S. and state census materials, Congressional reports, and company records also contain material on immigrants. In addition, the Integrated Public Use Microdata Series (IPUMS) web site at the University of Minnesota (http://www.ipums.umn.edu/usa/) contains data samples drawn from a number of federal censuses. Since the samples are of individuals and families, the site is useful in immigration research. A number of the countries from which the immigrants left also kept records about the individuals. Many of these records were originally summarized in Ferenczi (1970). Although records from other countries are useful for some purposes, the U.S. records are generally viewed as more complete, especially for the period before 1870. It is worthy of note that comparisons of the lists between countries often lead to somewhat different results. It is also probable that, during the early years, a few of the U.S. lists were lost or never collected.

Passenger Lists

The U.S. Passenger Lists resulted from an 1819 law requiring every ship carrying passengers that arrived in the United States from a foreign port to file with the port authorities a list of all passengers on the ship. These records are the basis for the vast majority of the historical data on immigration. For example, virtually all of the tables in the chapter on immigration in Carter et. al (2006) are based on these records. The Passenger Lists recorded a great deal of information. Each list indicates the name of the ship, the name of the captain, the port(s) of embarkation, the port of arrival, and the date of arrival. Following this information is a list of the passengers. Each person’s name is listed, along with age, gender, occupation, country of origin, country of destination, and whether or not the person died on the voyage. It is often possible to distinguish family groups since family members were usually grouped together and, to save time, the compilers frequently used ditto marks to indicate the same last name. Various data based on the lists were published in Senate or Congressional Reports at the time. Due to their usefulness in genealogical research, the lists are now widely available on microfilm and are increasingly available on CD-rom. Even a few public libraries in major cities have full or partial collections of these records. Most of the ship lists are also available on-line at various web sites.

The Volume of Immigration

Both the total volume of immigration to the United States and the immigrants’ countries of origins varied substantially over time. Table 1 provides the basic data on total immigrant volume by time period broken down by country or area of origin. The column “Average Yearly Total – All Countries” presents the average yearly total immigration to the United States in the time period given. Immigration rates – the average number of immigrants entering per thousand individuals in the U.S. population – are shown in the next column. The columns headed by country or area names show the percentage of immigrants coming from that place. The time periods in Table 1 have been chosen for illustrative purposes. A few things should be noted concerning the figures in Table 1. First, the estimates for much of the period since 1820 are based on the original Passenger Lists and are subject to the caveats discussed above. The estimates for the period before 1820 are the best currently available but are less precise than those after 1820. Second, though it was legal to import slaves into the United States (or the American colonies) before 1808, the estimates presented exclude slaves. Third, though illegal immigration into the United States has occurred, the figures in Table 1 include only legal immigrants. In 2015, the total number of illegal immigrants in the United States is estimated at around 11 million. These individuals were mostly from Mexico, Central America, and Asia.

Trends over Time

From the data presented in Table 1, it is apparent that the volume of immigration and its rate relative to the U.S. population varied over time. Immigration was relatively small until a noticeable increase occurred in the 1830s and a huge jump in the 1840s. The volume passed 200,000 for the first time in 1847 and the period between 1847 and 1854 saw the highest rate of immigration in U.S. history. From the level reached between 1847 and 1854, volume decreased and increased over time through 1930. For the period from 1847 through 1930, the average yearly volume was 434,000. During these years, immigrant volume peaked between 1900 and 1914, when an average of almost 900,000 immigrants arrived in the United States each year. This period is also second in terms of the rate of immigration relative to the U.S. population. The volume and rate fell to low levels between 1931 and 1946, though by the 1970s the volume had again reached that experienced between 1847 and 1930. The rise in volume continued through the 1980s and 1990s, though the rate per one thousand American residents has remained well below that experienced before 1915. It is notable that since about 1990, the average yearly volume of immigration has surpassed the previous peak experienced between 1900 and 1914. In 2015, reflecting the large volume of immigration, about 15 percent of the U.S. population was foreign-born.

Table 1
Immigration Volume and Rates

Years Average Yearly Total – All Countries Immigration Rates (Per 1000 Population) Percent of Average Yearly Total
Great Britain Ireland Scandinavia and Other NW Europe Germany Central and Eastern Europe Southern Europe Asia Africa Australia and Pacific Islands Mexico Other America
1630‑1700 2,200 —- —- —- —- —- —- —- —- —- —- —- —-
1700-1780 4,325 —- —- —- —- —- —- —- —- —- —- —- —-
1780-1819 9,900 —- —- —- —- —- —- —- —- —- —- —- —-
1820-1831 14,538 1.3 22 45 12 8 0 2 0 0 —- 4 6
1832-1846 71,916 4.3 16 41 9 27 0 1 0 0 —- 1 5
1847-1854 334,506 14.0 13 45 6 32 0 0 1 0 —- 0 3
1855-1864 160,427 5.2 25 28 5 33 0 1 3 0 —- 0 4
1865-1873 327,464 8.4 24 16 10 34 1 1 3 0 0 0 10
1874-1880 260,754 5.6 18 15 14 24 5 3 5 0 0 0 15
1881-1893 525,102 8.9 14 12 16 26 16 8 1 0 0 0 6
1894-1899 276,547 3.9 7 12 12 11 32 22 3 0 0 0 2
1900-1914 891,806 10.2 6 4 7 4 45 26 3 0 0 1 5
1915-1919 234,536 2.3 5 2 8 1 7 21 6 0 1 8 40
1920-1930 412,474 3.6 8 5 8 9 14 16 3 0 0 11 26
1931-1946 50,507 0.4 10 2 9 15 8 12 3 1 1 6 33
1947-1960 252,210 1.5 7 2 6 8 4 10 8 1 1 15 38
1961-1970 332,168 1.7 6 1 4 6 4 13 13 1 1 14 38
1971-1980 449,331 2.1 3 0 1 2 4 8 35 2 1 14 30
1981-1990 733,806 3.1 2 0 1 1 3 2 37 2 1 23 27
1991-2000 909,264 3.4 2 1 1 1 11 2 38 5 1 30 9
2001-2008 1,040,951 4.4 2 0 1 1 9 1 35 7 1 17 27
2009-2015 1,046,459 4.8 1 0 1 1 5 1 40 10 1 14 27

Sources: Years before 1820: Grabbe (1989). 1820-1970: Historical Statistics (1976). Years since 1970: U.S. Immigration and Naturalization Service (various years). Note: Entries with a zero indicate less than one-half of one percent. Entries with dashes indicate no information or no immigrants. 2002-2015: Department of Homeland Security: Office of Immigration Statistics (various years).

Sources of Immigration

The sources of immigration have changed a number of times over the years. In general, four relatively distinct periods can be identified in Table 1. Before 1881, the vast majority of immigrants, almost 86% of the total, arrived from northwest Europe, principally Great Britain, Ireland, Germany, and Scandinavia. During the colonial period, though the data do not allow an accurate breakdown, most immigrants arrived from Britain, with smaller numbers coming from Ireland and Germany. The years between 1881 and 1893 saw a transition in the sources of U.S. immigrants. After 1881, immigrant volume from central, eastern, and southern Europe began to increase rapidly. Between 1894 and 1914, immigrants from southern, central, and eastern Europe accounted for 69% of the total. With the onset of World War I in 1914, the sources of U.S. immigration again changed. From 1915 to the present day, a major source of immigrants to the United States has been the Western Hemisphere, accounting for 46% of the total. In the period between 1915 and 1960, virtually all of the remaining immigrants came from Europe, though no specific part of Europe was dominant. Beginning in the 1960s, immigration from Europe fell off substantially and was replaced by a much larger percentage of immigrants from Asia. Also noteworthy is the rise in immigration from Africa in the twenty-first century. Thus, over the course of U.S. history, the sources of immigration changed from northwestern Europe to southern, central and eastern Europe to the Americas in combination with Europe to the current situation where most immigrants come from the Americas, Asia and Africa.

Duration of Voyage and Method of Travel

Before the 1840s, immigrants arrived on sailing ships. General information on the length of the voyage is unavailable for the colonial and early national periods. By the 1840s, however, the average voyage length for ships from the British Isles was five to six weeks, with those from the European continent taking a week or so longer. In the 1840s, a few steamships began to cross the Atlantic. Over the course of the 1850s, steamships began to account for a larger, though still minority, percentage of immigrant travel. By 1873, virtually all immigrants arrived on steamships (Cohn 2005). As a result, the voyage time fell initially to about two weeks and it continued to decline into the twentieth century. Steamships remained the primary means of travel until after World War II. As a consequence of the boom in airplane travel over the last few decades, most immigrants now arrive via air.

Place of Arrival

Where immigrants landed in the United States varied, especially in the period before the Civil War. During the colonial and early national periods, immigrants arrived not only at New York City but also at a variety of other ports, especially Philadelphia, Boston, New Orleans, and Baltimore. Over time, and especially when most immigrants began arriving via steamship, New York City became the main arrival port. No formal immigration facilities existed at any of the ports until New York City established Castle Garden as its landing depot in 1855. This facility, located at the tip of Manhattan, was replaced in 1892 with Ellis Island, which in turn operated until 1954.

Death Rates during the Voyage

A final aspect to consider is the mortality experienced by the individuals on board the ships. Information taken from the Passenger Lists for the period of the sailing ship between 1820 and 1860 finds a loss rate of one to two percent of the immigrants who boarded (Cohn, 2009). Given the length of the trip and taking into account the ages of the immigrants, this rate represents mortality approximately four times higher than that experienced by non-migrants. Mortality was mainly due to outbreaks of cholera and typhus on some ships, leading to especially high death rates among children and the elderly. There appears to have been little trend over time in mortality or differences in the loss rate by country of origin, though some evidence suggests the loss rate may have differed by port of embarkation. In addition, the best evidence from the colonial period finds a loss rate only slightly higher than that of the antebellum years. In the period after the Civil War, with the change to steamships and the resulting shorter travel time and improved on-board conditions, mortality on the voyages fell, though exactly how much has not been determined.

The Causes of Immigration

Economic historians generally believe no single factor led to immigration. In fact, different studies have tried to explain immigration by emphasizing different factors, with the first important study being done by Thomas (1954). The most recent attempt to comprehensively explain immigration has been by Hatton and Williamson (1998), who focus on the period between 1860 and 1914. Massey (1999) expresses relatively similar views. Hatton and Williamson view immigration from a country during this time as being caused by up to five different factors: (a) the difference in real wages between the country and the United States; (b) the rate of population growth in the country 20 or 30 years before; (c) the degree of industrialization and urbanization in the home country; (d) the volume of previous immigrants from that country or region; and (e) economic and political conditions in the United States. To this list can be added factors not relevant during the 1860 to 1914 period, such as the potato famine, the movement from sail to steam, and the presence or absence of immigration restrictions. Thus, a total of at least eight factors affected immigration.

Causes of Fluctuations in Immigration Levels over Time

As discussed above, the total volume of immigration trended upward until World War I. The initial increase in immigration during the 1830s and 1840s was caused by improvements in shipping, more rapid population growth in Europe, and the potato famine in the latter part of the 1840s, which affected not only Ireland but also much of northwest Europe. As previously noted, the steamship replaced the sailing ship after the Civil War. By substantially reducing the length of the trip and increasing comfort and safety, the steamship encouraged an increase in the volume of immigration. Part of the reason volume increased was that temporary immigration became more likely. In this situation, an individual came to the United States not planning to stay permanently but instead planning to work for a period of time before returning home. All in all, the period from 1865 through 1914, when immigration was not restricted and steamships were dominant, saw an average yearly immigrant volume of almost 529,000. In contrast, average yearly immigration between 1820 and 1860 via sailing ship was only 123,000, and even between 1847 and 1860 was only 266,000.

Another feature of the data in Table 1 is that the yearly volume of immigration fluctuated quite a bit in the period before 1914. The fluctuations are mainly due to changes in economic and political conditions in the United States. Essentially, periods of low volume corresponded with U.S. economic depressions or times of widespread opposition to immigrants. In particular, volume declined during the nativist outbreak in the 1850s and the major depressions of the 1870s and 1890s and the Great Depression of the 1930s. As discussed in the next section, the United States imposed widespread restrictions on immigration beginning in the 1920s. Since then, the volume has been subject to more direct determination by the United States government. Thus, fluctuations in the total volume of immigration over time are due to four of the eight factors discussed in the first paragraph of this section: the potato famine, the movement from sail to steam, economic and political conditions in the United States, and the presence or absence of immigration restrictions.

Factors Influencing Immigration Rates from Particular Countries

The other four factors are primarily used to explain changes in the source countries of immigration. A larger difference in real wages between the country and the United States increased immigration from the country because it meant immigrants had more to gain from the move. Because most immigrants were between 15 and 35 years old, a higher population growth 20 or 30 years earlier meant there were more individuals in the potential immigrant group. In addition, a larger volume of young workers in a country reduced job prospects at home and further encouraged immigration. A greater degree of industrialization and urbanization in the home country typically increased immigration because traditional ties with the land were broken during this period, making laborers in the country more mobile. Finally, the presence of a larger volume of previous immigrants from that country or region encouraged more immigration because potential immigrants now had friends or relatives to stay with who could smooth their transition to living and working in the United States.

Based on these four factors, Hatton and Williamson explain the rise and fall in the volume of immigration from a country to the United States. Immigrant volume initially increased as a consequence of more rapid population growth and industrialization in a country and the existence of a large gap in real wages between the country and the United States. Within a number of years, volume increased further due to the previous immigration that had occurred. Volume remained high until various changes in Europe caused immigration to decline. Population growth slowed. Most of the countries had undergone industrialization. Partly due to the previous immigration, real wages rose at home and became closer to those in the United States. Thus, each source country went through stages where immigration increased, reached a peak, and then declined.

Differences in the timing of these effects then led to changes in the source countries of the immigrants. The countries of northwest Europe were the first to experience rapid population growth and to begin industrializing. By the latter part of the nineteenth century, immigration from these countries was in the stage of decline. At about the same time, countries in central, eastern, and southern Europe were experiencing the beginnings of industrialization and more rapid population growth. This model holds directly only through the 1920s, because U.S. government policy changed. At that point, quotas were established on the number of individuals allowed to immigrate from each country. Even so, many countries, especially those in northwest Europe, had passed the point where a large number of individuals wanted to leave and thus did not fill their quotas. The quotas were binding for many other countries in Europe in which pressures to immigrate were still strong. Even today, the countries providing the majority of immigrants to the United States, those south of the United States and in Asia and Africa, are places where population growth is high, industrialization is breaking traditional ties with the land, and real wage differentials with the United States are large.

Immigration Policy and Nativism

This section summarizes the changes in U.S. immigration policy. Only the most important policy changes are discussed and a number of relatively minor changes have been ignored. Interested readers are referred to Le May (1987) and Briggs (1984) for more complete accounts of U.S. immigration policy.

Few Restrictions before 1882

Immigration into the United States was subject to virtually no legal restrictions before 1882. Essentially, anyone who wanted to enter the United States could and, as discussed earlier, no specified arrival areas existed until 1855. Individuals simply got off the ship and went about their business. Little opposition among U.S. citizens to immigration is apparent until about the 1830s. The growing concern at this time was due to the increasing volume of immigration in both absolute terms and relative to the U.S. population, and the facts that more of the arrivals were Catholic and unskilled. The nativist feeling burst into the open during the 1850s when the Know-Nothing political party achieved a great deal of political success in the 1854 off-year elections. This party did not favor restrictions on the number of immigrants, though they did seek to restrict their ability to quickly become voting citizens. For a short period of time, the Know-Nothings had an important presence in Congress and many state legislatures. With the downturn in immigration in 1855 and the nation’s attention turning more to the slavery issue, their influence receded.

Chinese Exclusion Act

The first restrictive immigration laws were directed against Asian countries. The first law was the Chinese Exclusion Act of 1882. This law essentially prohibited the immigration of Chinese citizens and it stayed in effect until it was removed during World War II. In 1907, Japanese immigration was substantially reduced through a Gentlemen’s Agreement between Japan and the United States. It is noteworthy that the Chinese Exclusion Act also prohibited the immigration of “convicts, lunatics, idiots” and those individuals who might need to be supported by government assistance. The latter provision was used to some extent during periods of high unemployment, though as noted above, immigration fell anyway because of the lack of jobs.

Literacy Test Adopted in 1917

The desire to restrict immigration to the United States grew over the latter part of the nineteenth century. This growth was due partly to the high volume and rate of immigration and partly to the changing national origins of the immigrants; more began arriving from southern, central, and eastern Europe. In 1907, Congress set up the Immigration Commission, chaired by Senator William Dillingham, to investigate immigration. This body issued a famous report, now viewed as flawed, concluding that immigrants from the newer parts of Europe did not assimilate easily and, in general, blaming them for various economic ills. Attempts at restricting immigration were initially made by proposing a law requiring a literacy test for admission to the United States, and such a law was finally passed in 1917. This same law also virtually banned immigration from any country in Asia. Restrictionists were no doubt displeased when the volume of immigration from Europe resumed its former level after World War I in spite of the literacy test. The movement then turned to explicitly limiting the number of arrivals.

1920s: Quota Act and National Origins Act

The Quota Act of 1921 laid the framework for a fundamental change in U.S. immigration policy. It limited the number of immigrants from Europe to a total of about 350,000 per year. National quotas were established in direct proportion to each country’s presence in the U.S. population in 1910. In addition, the act assigned Asian countries quotas near zero. Three years later in 1924, the National Origins Act instituted a requirement that visas be obtained from an American consulate abroad before immigrating, reduced the total European quota to about 165,000, and changed how the quotas were determined. Now, the quotas were established in direct proportion to each country’s presence in the U.S. population in 1890, though this aspect of the act was not fully implemented until 1929. Because relatively few individuals immigrated from southern, central, and eastern Europe before 1890, the effect of the 1924 law was to drastically reduce the number of individuals allowed to immigrate to the United States from these countries. Yet total immigration to the United States remained fairly high until the Great Depression because neither the 1921 nor the 1924 law restricted immigration from the Western Hemisphere. Thus, it was the combination of the outbreak of World War I and the subsequent 1920s restrictions that caused the Western Hemisphere to become a more important source of immigrants to the United States after 1915, though it should be recalled the rate of immigration fell to low levels after 1930.

Immigration and Nationality Act of 1965

The last major change in U.S. immigration policy occurred with the passage of the Immigration and Nationality Act of 1965. This law abolished the quotas based on national origins. Instead, a series of preferences were established to determine who would gain entry. The most important preference was given to relatives of U.S. citizens and permanent resident aliens. By the twenty-first century, about two-thirds of immigrants came through these family channels. Preferences were also given to professionals, scientists, artists, and workers in short supply. The 1965 law kept an overall quota on total immigration for Eastern Hemisphere countries, originally set at 170,000, and no more than 20,000 individuals were allowed to immigrate to the United States from any single country. This law was designed to treat all countries equally. Asian countries were treated the same as any other country, so the virtual prohibition on immigration from Asia disappeared. In addition, for the first time the law also limited the number of immigrants from Western Hemisphere countries, with the original overall quota set at 120,000. It is important to note that neither quota was binding because immediate relatives of U.S. citizens, such as spouses, parents, and minor children, were exempt from the quota. In addition, the United States has admitted large numbers of refugees at different times from Vietnam, Haiti, Cuba, and other countries. Finally, many individuals enter the United States on student visas, enroll in colleges and universities, and eventually get companies to sponsor them for a work visa. Thus, the total number of legal immigrants to the United States since 1965 has always been larger than the combined quotas. This law has led to an increase in the volume of immigration and, by treating all countries the same, has led to Asia recently becoming a more important source of U.S. immigrants.

Though features of the 1965 law have been modified since it was enacted, this law still serves as the basis for U.S. immigration policy today. The most important modifications occurred in 1986 when employer sanctions were adopted for those hiring illegal workers. On the other hand, the same law also gave temporary resident status to individuals who had lived illegally in the United States since before 1982. The latter feature led to very high volumes of legal immigration being recorded in 1989, 1990, and 1991.

The Characteristics of the Immigrants

In this section, various characteristics of the immigrant stream arriving at different points in time are discussed. The following characteristics of immigration are analyzed: gender breakdown, age structure, family vs. individual migration, and occupations listed. Virtually all the information is based on the Passenger Lists, a source discussed above.

Gender and Age

Data are presented in Table 2 on the gender breakdown and age structure of immigration. The gender breakdown and age structure remain fairly consistent in the period before 1930. Generally, about 60% of the immigrants were male. As to age structure, about 20% of immigrants were children, 70% were adults up to age 44, and 10% were older than 44. In most of the period and for most countries, immigrants were typically young single males, young couples, or, especially in the era before the steamship, families. For particular countries, such as Ireland, a large number of the immigrants were single women (Cohn, 1995). The primary exception to this generalization was the 1899-1914 period, when 68% of the immigrants were male and adults under 45 accounted for 82% of the total. This period saw the immigration of a large number of single males who planned to work for a period of months or years and return to their homeland, a development made possible by the steamship shortening the voyage and reducing its cost (Nugent, 1992). The characteristics of the immigrant stream since 1930 have been somewhat different. Males have comprised less than one-half of all immigrants. In addition, the percentage of immigrants over age 45 has increased at the expense of those between the ages of 14 and 44.

Table 2
Immigration by Gender and Age

Percent Males Percent under 14 years Percent 14–44 years Percent 45 years and over
Years
1820-1831 70 19 70 11
1832-1846 62 24 67 10
1847-1854 59 23 67 10
1855-1864 58 19 71 10
1865-1873 62 21 66 13
1873-1880 63 19 69 12
1881-1893 61 20 71 10
1894-1898 57 15 77 8
1899-1914 68 12 82 5
1915-1917 59 16 74 10
1918-1930 56 18 73 9
1931-1946 40 15 67 17
1947-1960 45 21 64 15
1961-1970 45 25 61 14
1971-1980 46 24 61 15
1981-1990 52 18 66 16
1991-2000 51 17 65 18
2001-2008 45 15 64 21
2009-2015 45 15 61 24

Notes: From 1918-1970, the age breakdown is “Under 16″ and “16-44.” From 1971 to 1998, the age breakdown is “Under 15″ and “15-44.” For 2001-2015, it is again “Under 16” and “16-44.”

Sources: 1820-1970: Historical Statistics (1976). Years since 1970: U.S. Immigration and Naturalization Service (various years). 2002-2015: Department of Homeland Security: Office of Immigration Statistics (various years).

Occupations

Table 3 presents data on the percentage of immigrants who did not report an occupation and the percentage breakdown of those reporting an occupation. The percentage not reporting an occupation declined through 1914. The small percentages between 1894 and 1914 are a reflection of the large number of single males who arrived during this period. As is apparent, the classification scheme for occupations has changed over time. Though there is no perfect way to correlate the occupation categories used in the different time periods, skilled workers comprised about one-fourth of the immigrant stream through 1970. The immigration of farmers was important before the Civil War but declined steadily over time. The percentage of laborers has varied over time, though during some time periods they comprised one-half or more of the immigrants. The highest percentages of laborers occurred during good years for the U.S. economy (1847-54, 1865-73, 1881-93, 1899-1914), because laborers possessed the fewest skills and would have an easier time finding a job when the U.S. economy was strong. Commercial workers, mainly merchants, were an important group of immigrants very early when immigrant volume was low, but their percentage fell substantially over time. Professional workers were always a small part of U.S. immigration until the 1930s. Since 1930, these workers have comprised a larger percentage of immigrants reporting an occupation.

Table 3
Immigration by Occupation

Year Percent with no occup. listed Percent of immigrants with an occupation in each category
Professional Commercial Skilled Farmers Servants Laborers Misc.
1820-1831 61 3 28 30 23 2 14
1832-1846 56 1 12 27 33 2 24
1847-1854 54 0 6 18 33 2 41
1855-1864 53 1 12 23 23 4 37 0
1865-1873 54 1 6 24 18 7 44 1
1873-1880 47 2 4 24 18 8 40 5
1881-1893 49 1 3 20 14 9 51 3
1894-1898 38 1 4 25 12 18 37 3
Professional, technical, and kindred workers Farmers and farm managers Managers, officials, and proprietors, exc. farm Clerical, sales, and kindred workers Craftsmen, foremen, operatives, and kindred workers Private HH workers Service workers, exc. private household Farm laborers and foremen Laborers, exc. farm and mine
1899-1914 26 1 2 3 2 18 15 2 26 33
1915-1919 37 5 4 5 5 21 15 7 11 26
1920-1930 39 4 5 4 7 24 17 6 8 25
1931-1946 59 19 4 15 13 21 13 6 2 7
1947-1960 53 16 5 5 17 31 8 6 3 10
1961-1970 56 23 2 5 17 25 9 7 4 9
1971-1980 59 25 — a 8 12 36 — b 15 5 — c
1981-1990 56 14 — a 8 12 37 — b 22 7 — c
1991-2000 61 17 — a 7 9 23 — b 14 30 — c
2001-2008 76 45 — a — d 14 21 — b 18 5 — c
2009-2015 76 46 — a — d 12 19 — b 19 5 — c

a – included with “Farm laborers and foremen”; b – included with “Service workers, etc.”; c – included with “Craftsmen, etc.”; d – included with “Professional.”

Sources: 1820-1970: Historical Statistics (1976). Years since 1970: U.S. Immigration and Naturalization Service (various years). 2002-2015: Department of Homeland Security: Office of Immigration Statistics (various years). From 1970 through 2001, the INS has provided the following occupational categories: Professional, specialty, and technical (listed above under “Professional”); Executive, administrative, and managerial (listed above under “Managers, etc.”); Sales; Administrative support (these two are combined and listed above under “Clerical, etc.”); Precision production, craft, and repair; Operator, fabricator, and laborer (these two are combined and listed above under “Craftsmen, etc.”); Farming, forestry, and fishing (listed above under “Farm laborers and foremen”); and Service (listed above under “Service workers, etc.). Since 2002, the Department of Homeland Security has combined the Professional and Executive categories.  Note: Entries with a zero indicate less than one-half of one percent. Entries with dashes indicate no information or no immigrants.

Skill Levels

The skill level of the immigrant stream is important because it potentially affects the U.S. labor force, an issue considered in the next section. Before turning to this issue, a number of comments can be made concerning the occupational skill level of the U.S. immigration stream. First, skill levels fell substantially in the period before the Civil War. Between 1820 and 1831, only 39% of the immigrants were farmers, servants, or laborers, the least skilled groups. Though the data are not as complete, immigration during the colonial period was almost certainly at least this skilled. By the 1847-54 period, however, the less-skilled percentage had increased to 76%. Second, the less-skilled percentage did not change dramatically late in the nineteenth century when the source of immigration changed from northwest Europe to other parts of Europe. Comparing 1873-80 with 1899-1914, both periods of high immigration, farmers, servants, and laborers accounted for 66% of the immigrants in the former period and 78% in the latter period. The second figure is, however, similar to that during the 1847-54 period. Third, the restrictions on immigration imposed during the 1920s had a sizable effect on the skill level of the immigrant stream. Between 1930 and 1970, only 31-34% of the immigrants were in the least-skilled group.

Fourth, a deterioration in immigrant skills appears in the numbers in the 1980s and 1990s, and then an improvement appears since 2001. Both changes may be an illusion.. In Table 3 for the 1980s and 1990s, the percentage in the “Professional” category falls while the percentages in the “Service” and “Farm workers” categories rise. These changes are, however, due to the amnesty for illegal immigrants resulting from the 1986 law. The amnesty led to the recorded volume of immigration in 1989, 1990, and 1991 being much higher than typical, and most of the “extra” immigrants recorded their occupation as “Service” or “Farm laborer.” If these years are ignored, then little change occurred in the occupational distribution of the immigrant stream during the 1980s and 1990s. Two caveats, however, should be noted. First, the illegal immigrants can not, of course, be ignored. Second, the skill level of the U.S. labor force was improving over the same period. Thus, relative to the U.S. labor force and including illegal immigration, it is apparent the occupational skill level of the U.S. immigrant stream declined during the 1980s and 1990s.  Turning to the twenty-first century, the percentage of the legal immigrant stream in the highest-skilled category appears to have increased. This conclusion is also not certain because the changes that occurred in how occupations were categorized beginning in 2001 make a straightforward comparison potentially inexact. This uncertainty is increased by the growing percentage of immigrants for which no occupation is reported. It is not clear whether a larger percentage of those arriving actually did not work (recall that a growing percentage of legal immigrants are somewhat older) or if more simply did not list an occupation. Overall, detecting changes in the skill level of the legal immigrant stream since about 1930 is fraught with difficulty.

The Effects of Immigration on the United States Economy

Though immigration has effects on the country from which the immigrants leave, this section only examines the effects on the United States, mainly those occurring over longer periods of time. Over short periods of time, sizeable and potentially negative effects can occur in a specific area when there is a huge influx of immigrants. A large number of arrivals in a short period of time in one city can cause school systems to become overcrowded, housing prices and welfare payments to increase, and jobs to become difficult to obtain. Yet most economists believe the effects of immigration over time are much less harmful than commonly supposed and, in many ways, are beneficial. . The following longer-term issues are discussed: the effects of immigration on the overall wage rate of U.S. workers; the effects on the wages of particular groups of workers, such as those who are unskilled; and the effects on the rate of economic growth, that is, the standard of living, in the United States. Determining the effects of immigration on the United States is complex and virtually none of the conclusions presented here are without controversy.

Immigration’s Impact on Overall Wage Rates

Immigration is popularly thought to lower the overall wage rate in the United States by increasing the supply of individuals looking for jobs. This effect may occur in an area over a fairly short period of time. Over longer time periods, however, wages will only fall if the amounts of other resources don’t change. Wages will not fall if the immigrants bring sufficient amounts of other resources with them, such as capital, or cause the amount of other resources in the economy to increase sufficiently. For example, historically the large-scale immigration from Europe contributed to rapid westward expansion of the United States during most of the nineteenth century. The westward expansion, however, increased the amounts of land and natural resources that were available, factors that almost certainly kept immigration from lowering wage rates. Immigrants also increase the amounts of other resources in the economy through running their own businesses, which both historically and in recent times has occurred at a greater rate among immigrants than native workers. By the beginning of the twentieth century, the westward frontier had been settled. A number of researchers have estimated that immigration did lower wages at this time (Hatton and Williamson, 1998; Goldin, 1994), though others have criticized these findings (Carter and Sutch, 1999). For the recent time period, most studies have found little effect of immigration on the level of wages, though a few have found an effect (Borjas, 1999).

Even if immigration leads to a fall in the wage rate, it does not follow that individual workers are worse off. Workers typically receive income from sources other than their own labor. If wages fall, then many other resource prices in the economy rise. For example, immigration increases the demand for housing and land and existing owners benefit from an increase in the current value of their property. Whether any individual worker is better off or worse off in this case is not easy to determine. It depends on the amounts of other resources each individual possesses.

Immigration’s Impact on Wages of Unskilled Workers

Consider the second issue, the effects of immigration on the wages of unskilled workers. If the immigrants arriving in the country are primarily unskilled, then the larger number of unskilled workers could cause their wage to fall if the overall demand for these workers doesn’t change. A requirement for this effect to occur is that the immigrants be less skilled than the U.S. labor force they enter. As discussed above, during colonial times immigrant volume was small and the immigrants were probably more skilled than the existing U.S. labor force. During the 1830s and 1840s, the volume and rate of immigration increased substantially and the skill level of the immigrant stream fell to approximately match that of the native labor force. Instead of lowering the wages of unskilled workers relative to those of skilled workers, however, the large inflow apparently led to little change in the wages of unskilled workers, while some skilled workers lost and others gained. The explanation for these results is that the larger number of unskilled workers resulting from immigration was a factor in employers adopting new methods of production that used more unskilled labor. As a result of this technological change, the demand for unskilled workers increased so their wage did not decline. As employers adopted these new machines, however, skilled artisans who had previously done many of these jobs, such as iron casting, suffered losses. Other skilled workers, such as many white-collar workers who were not in direct competition with the immigrants, gained. Some evidence exists to support a differential effect on skilled workers during the antebellum period (Williamson and Lindert, 1980; Margo, 2000). After the Civil War, however, the skill level of the immigrant stream was close to that of the native labor force, so immigration probably did not further affect the wage structure through the 1920s (Carter and Sutch, 1999).

Impact since World War II

The lower volume of immigration in the period from 1930 through 1960 meant immigration had little effect on the relative wages of different workers during these years. With the resumption of higher volumes of immigration after 1965, however, and with the immigrants’ skill levels being low through 2000, an effect on relative wages again became possible. In fact, the relative wages of high-school dropouts in the United States deteriorated during the same period, especially after the mid-1970s. Researchers who have studied the question have concluded that immigration accounted for about one-fourth of the wage deterioration experienced by high-school dropouts during the 1980s, though some researchers find a lower effect and others a higher one (Friedberg and Hunt, 1995; Borjas, 1999). Wages are determined by a number of factors other than immigration. In this case, it is thought the changing nature of the economy, such as the widespread use of computers increasing the benefits to education, bears more of the blame for the decline in the relative wages of high-school dropouts.

Economic Benefits from Immigration

Beyond any effect on wages, there are a number of ways in which immigration might improve the overall standard of living in an economy. First, immigrants may engage in inventive or scientific activity, with the result being a gain to everyone. Evidence exists for both the historical and more recent periods that the United States has attracted individuals with an inventive/scientific nature. The United States has always been a leader in these areas. Individuals are more likely to be successful in such an environment than in one where these activities are not as highly valued. Second, immigrants expand the size of markets for various goods, which may lead to lower firms’ average costs due to an increase in firm size. The result would be a decrease in the price of the goods in question. Third, most individuals immigrate between the ages of 15 and 35, so the expenses of their basic schooling are paid abroad. In the past, most immigrants, being of working age, immediately got a job. Thus, immigration increased the percentage of the population in the United States that worked, a factor that raises the average standard of living in a country. Even in more recent times, most immigrants work, though the increased proportion of older individuals in the immigrant stream means the positive effects from this factor may be lower than in the past. Fourth, while immigrants may place a strain on government services in an area, such as the school system, they also pay taxes. Even illegal immigrants directly pay sales taxes on their purchases of goods and indirectly pay property taxes through their rent. Finally, the fact that immigrants are less likely to immigrate to the United States during periods of high unemployment is also beneficial. By reducing the number of people looking for jobs during these periods, this factor increases the likelihood U.S. citizens will be able to find a job.

The Experience of Immigrants in the U.S. Labor Market

This section examines the labor market experiences of immigrants in the United States. The issue of discrimination against immigrants in jobs is investigated along with the issue of the success immigrants experienced over time. Again, the issues are investigated for the historical period of immigration as well as more recent times. Interested readers are directed to Borjas (1999), Ferrie (2000), Carter and Sutch (1999), Hatton and Williamson (1998), and Friedberg and Hunt (1995) for more technical discussions.

Did Immigrants Face Labor Market Discrimination?

Discrimination can take various forms. The first form is wage discrimination, in which a worker of one group is paid a wage lower than an equally productive worker of another group. Empirical tests of this hypothesis generally find this type of discrimination has not existed. At any point in time, immigrants have been paid the same wage for a specific job as a native worker. If immigrants generally received lower wages than native workers, the differences reflected the lower skills of the immigrants. Historically, as discussed above, the skill level of the immigrant stream was similar to that of the native labor force, so wages did not differ much between the two groups. During more recent years, the immigrant stream has been less skilled than the native labor force, leading to the receipt of lower wages by immigrants. A second form of discrimination is in the jobs an immigrant is able to obtain. For example, in 1910, immigrants accounted for over half of the workers in various jobs; examples are miners, apparel workers, workers in steel manufacturing, meat packers, bakers, and tailors. If a reason for the employment concentration was that immigrants were kept out of alternative higher paying jobs, then the immigrants would suffer. This type of discrimination may have occurred against Catholics during the 1840s and 1850s and against the immigrants from central, southern, and eastern Europe after 1890. In both cases, it is possible the immigrants suffered because they could not obtain higher paying jobs. In more recent years, reports of immigrants trained as doctors, say, in their home country but not allowed to easily practice as such in the United States, may represent a similar situation. Yet the open nature of the U.S. schooling system and economy has been such that this effect usually did not impact the fortunes of the immigrants’ children or did so at a much smaller rate.

Wage Growth, Job Mobility, and Wealth Accumulation

Another aspect of how immigrants fared in the U.S. labor market is their experiences over time with respect to wage growth, job mobility, and wealth accumulation. A study done by Ferrie (1999) for immigrants arriving between 1840 and 1850, the period when the inflow of immigrants relative to the U.S. population was the highest, found immigrants from Britain and Germany generally improved their job status over time. By 1860, over 75% of the individuals reporting a low-skilled job on the Passenger Lists had moved up into a higher-skilled job, while fewer than 25% of those reporting a high-skilled job on the Passenger Lists had moved down into a lower-skilled job. Thus, the job mobility for these individuals was high. For immigrants from Ireland, the experience was quite different; the percentage of immigrants moving up was only 40% and the percentage moving down was over 50%. It isn’t clear if the Irish did worse because they had less education and fewer skills or whether the differences were due to some type of discrimination against them in the labor market. As to wealth, all the immigrant groups succeeded in accumulating larger amounts of wealth the longer they were in the United States, though their wealth levels fell short of those enjoyed by natives. Essentially, the evidence indicates antebellum immigrants were quite successful over time in matching their skills to the available jobs in the U.S. economy.

The extent to which immigrants had success over time in the labor market in the period since the Civil War is not clear. Most researchers have thought that immigrants who arrived before 1915 had a difficult time. For example, Hanes (1996) concludes that immigrants, even those from northwest Europe, had slower earnings growth over time than natives, a finding he argues was due to poor assimilation. Hatton and Williamson (1998), on the other hand, criticize these findings on technical grounds and conclude that immigrants assimilated relatively easily into the U.S. labor market. For the period after World War II, Chiswick (1978) argues that immigrants’ wages have increased relative to those of natives the longer the immigrants have been in the United States. Borjas (1999) has criticized Chiswick’s finding by suggesting it is caused by a decline in the skills possessed by the arriving immigrants between the 1950s and the 1990s. Borjas finds that 25- to 34-year-old male immigrants who arrived in the late 1950s had wages 9% lower than comparable native males, but by 1970 had wages 6% higher. In contrast, those arriving in the late 1970s had wages 22% lower at entry. By the late 1990s, their wages were still 12% lower than comparable natives. Overall, the degree of success experienced by immigrants in the U.S. labor market remains an area of controversy.

References

Borjas, George J. Heaven’s Door: Immigration Policy and the American Economy. Princeton: Princeton University Press, 1999.

Briggs, Vernon M., Jr. Immigration and the American Labor Force. Baltimore: Johns Hopkins University Press, 1984.

Carter, Susan B., and Richard Sutch. “Historical Perspectives on the Economic Consequences of Immigration into the United States.” In The Handbook of International Migration: The American Experience, edited by Charles Hirschman, Philip Kasinitz, and Josh DeWind, 319-341. New York: Russell Sage Foundation, 1999

Carter, Susan B., et. al.  Historical Statistics of the United States: Earliest Times to the Present – Millennial Edition. Volume 1: Population. New York: Cambridge University Press, 2006.

Chiswick, Barry R. “The Effect of Americanization on the Earnings of Foreign-Born Men.” Journal of Political Economy 86 (1978): 897-921.

Cohn, Raymond L. “A Comparative Analysis of European Immigrant Streams to the United States during the Early Mass Migration.” Social Science History 19 (1995): 63-89.

Cohn, Raymond L.  “The Transition from Sail to Steam in Immigration to the United States.” Journal of Economic History 65 (2005): 479-495.

Cohn, Raymond L. Mass Migration under Sail: European Immigration to the Antebellum United States. New York: Cambridge University Press, 2009.

Erickson, Charlotte J. Leaving England: Essays on British Emigration in the Nineteenth Century. Ithaca: Cornell University Press, 1994.

Ferenczi, Imre. International Migrations. New York: Arno Press, 1970.

Ferrie, Joseph P. Yankeys Now: Immigrants in the Antebellum United States, 1840-1860. New York: Oxford University Press, 1999.

Friedberg, Rachael M., and Hunt, Jennifer. “The Impact of Immigrants on Host Country Wages, Employment and Growth.” The Journal of Economic Perspectives 9 (1995): 23-44.

Goldin, Claudia. “The Political Economy of Immigration Restrictions in the United States, 1890 to 1921.” In The Regulated Economy: A Historical Approach to Political Economy, edited by Claudia Goldin and Gary D. Libecap, 223-257. Chicago: University of Chicago Press, 1994.

Grabbe, Hans-Jürgen. “European Immigration to the United States in the Early National Period, 1783-1820.” Proceeding of the American Philosophical Society 133 (1989): 190-214.

Hanes, Christopher. “Immigrants’ Relative Rate of Wage Growth in the Late Nineteenth Century.” Explorations in Economic History 33 (1996): 35-64.

Hansen, Marcus L. The Atlantic Migration, 1607-1860. Cambridge, MA.: Harvard University Press, 1940.

Hatton, Timothy J., and Jeffrey G. Williamson. The Age of Mass Migration: Causes and Economic Impact. New York: Oxford University Press, 1998.

Jones, Maldwyn Allen. American Immigration. Chicago: University of Chicago Press, Second Edition, 1960.

Le May, Michael C. From Open Door to Dutch Door: An Analysis of U.S. Immigration Policy Since 1820. New York: Praeger, 1987.

Margo, Robert A. Wages and Labor Markets in the United States, 1820-1860. Chicago: University of Chicago Press, 2000.

Massey, Douglas S. “Why Does Immigration Occur? A Theoretical Synthesis.” In The Handbook of International Migration: The American Experience, edited by Charles Hirschman, Philip Kasinitz, and Josh DeWind, 34-52. New York: Russell Sage Foundation, 1999.

Miller, Kerby A. Emigrants and Exiles: Ireland and the Irish Exodus to North America. Oxford: Oxford University Press, 1985.

Nugent, Walter. Crossings: The Great Transatlantic Migrations, 1870-1914. Bloomington and Indianapolis: Indiana University Press, 1992.

Taylor, Philip. The Distant Magnet. New York: Harper & Row, 1971.

Thomas, Brinley. Migration and Economic Growth: A Study of Great Britain and the Atlantic Economy. Cambridge, U.K.: Cambridge University Press, 1954.

U.S. Department of Commerce. Historical Statistics of the United States. Washington, DC, 1976.

U.S. Immigration and Naturalization Service. Statistical Yearbook of the Immigration and Naturalization Service. Washington, DC: U.S. Government Printing Office, various years.

Walker, Mack. Germany and the Emigration, 1816-1885. Cambridge, MA: Harvard University Press, 1964.

Williamson, Jeffrey G., and Peter H. Lindert, Peter H. American Inequality: A Macroeconomic History. New York: Academic Press, 1980.

Economic History of Hawai’i

Sumner La Croix, University of Hawai’i and East-West Center

The Hawaiian Islands are a chain of 132 islands, shoals, and reefs extending over 1,523 miles in the Northeast Pacific Ocean. Eight islands — Hawai’i, Maui, O’ahu, Kaua’i, Moloka’i, Lana’i, Ni’ihau, and Kaho’olawe — possess 99 percent of the land area (6,435 square miles) and are noted for their volcanic landforms, unique flora and fauna, and diverse climates.

From Polynesian Settlement to Western Contact

The Islands were uninhabited until sometime around 400 AD when Polynesian voyagers sailing double-hulled canoes arrived from the Marquesas Islands (Kirch, 1985, p. 68). Since the settlers had no written language and virtually no contact with the Western world until 1778, our knowledge of Hawai’i’s pre-history comes primarily from archaeological investigations and oral legends. A relatively egalitarian society and subsistence economy were coupled with high population growth rates until about 1100 when continued population growth led to a major expansion of the areas of settlement and cultivation. Perhaps under pressures of increasing resource scarcity, a new, more hierarchical social structure emerged, characterized by chiefs (ali’i) and subservient commoners (maka’ainana). In the two centuries prior to Western contact, there is considerable evidence that ruling chiefs (ali’i nui) competed to extend their lands by conquest and that this led to cycles of expansion and retrenchment.

Captain James Cook’s ships reached Hawai’i in 1778, thereby ending a long period of isolation for the Islands. Captain James King observed in 1779 that Hawaiians were generally “above the middle size” of Europeans, a rough indicator that Hawaiians generally had a diet superior to eighteenth-century Europeans. At contact, Hawaiian social and political institutions were similar to those found in other Polynesian societies. Hawaiians were sharply divided into three main social classes: ali’i (chiefs), maka’ainana (commoners), and kahuna (priests). Oral legends tell us that the Islands were usually divided into six to eight small kingdoms consisting of an island or part of an island, each governed by an ali’i nui (ruling chief). The ali’i nui had extensive rights to all lands and material goods and the ability to confiscate or redistribute material wealth at any time. Redistribution usually occurred only when a new ruling chief took office or when lands were conquered or lost. The ali’i nui gave temporary land grants to ali’i who, in turn, gave temporary land grants to konohiki (managers), who then “contracted” with maka’ainana, the great majority of the populace, to work the lands.

The Hawaiian society and economy has its roots in extended families (‘ohana) working cooperatively on an ahupua’a, a land unit running from the mountains to the sea. Numerous tropical root, tuber, and tree crops were cultivated. Taro, a wetland crop, was cultivated primarily in windward areas, while sweet potatoes and yams, both dryland crops, were cultivated in drier leeward areas. The maka’ainana apparently lived well above subsistence levels, with extensive time available for cultural activities, sports, and games. There were unquestionably periods of hardship, but these times tended to be associated with drought or other causes of poor harvest.

Unification of Hawai’i and Population Decline

The long-prevailing political equilibrium began to disintegrate shortly after the introduction of guns and the spread of new diseases to the Islands. In 1784, the most powerful ali’i nui, Kamehameha, began a war of conquest, and with his superior use of modern weapons and western advisors, he subdued all other chiefdoms, with the exception of Kaua’i, by 1795. Each chief in his ruling coalition received the right to administer large areas of land, consisting of smaller strips on various islands. Sumner La Croix and James Roumasset (1984) have argued that the strip system conveyed durability to the newly unified kingdom (by making it more costly for an ali’i to accumulate a power base on one island) and facilitated monitoring of ali’i production by the new king. In 1810, Kamehameha reached a negotiated settlement with Kaumuali’i, the ruling chief of Kaua’i, which brought the island under his control, thereby bringing the entire island chain under a single monarchy.

Exposure to Western diseases produced a massive decline in the native population of Hawai’i from 1778 through 1900 (Table 1). Estimates of Hawai’i’s population at the time of contact vary wildly, from approximately 110,000 to one million people (Bushnell, 1993; Dye, 1994). The first missionary census in 1831-1832 counted 130,313 people. A substantial portion of the decline can be attributed to a series of epidemics beginning after contact, including measles, influenza, diarrhea, and whooping cough. The introduction of venereal diseases was a factor behind declining crude birth rates. The first accurate census conducted in the Islands revealed a population of 80,641 in 1849. The native Hawaiian population reached its lowest point in 1900 when the U.S. census revealed only 39,656 full or part Hawaiians.

Table 1: Population of Hawai’i

Year

Total Population

Native Hawaiian Population

1778

110,000-1,000,000

110,000-1,000,000

1831-32

130,313

Na

1853

73,137

71,019

1872

56,897

51,531

1890

89,990

40,622

1900

154,001

39,656

1920

255,881

41,750

1940

422,770

64,310

1960

632,772

102,403

1980

964,691

115,500

2000

1,211,537

239,655

Sources: Total population from http://www.hawaii.gov/dbedt/db99/index.html, Table 1.01, Dye (1994), and Bushnell (1993). Native Hawaiian population for 1853-1960 from Schmitt (1977), p. 25. Data from the 2000 census includes people declaring “Native Hawaiian” as their only race or one of two races. See http://factfinder.census.gov/servlet/DTTable?_ts=18242084330 for the 2000 census population.

The Rise and Fall of Sandalwood and Whaling

With the unification of the Islands came the opening of foreign trade. Trade in sandalwood, a wood in demand in China for ornamental uses and burning as incense, began in 1805. The trade was interrupted by the War of 1812 and then flourished from 1816 to the late 1820s before fading away in the 1830s and 1840s (Kuykendall, 1957, I, pp. 86-87). La Croix and Roumasset (1984) have argued that the centralized organization of the sandalwood trade under King Kamehameha provided the king with incentives to harvest sandalwood efficiently. The adoption of a decentralized production system by his successor (Liholiho) led to the sandalwood being treated by ali’i as a common property resource. The reallocation of resources from agricultural production to sandalwood production not only led to rapid exhaustion of the sandalwood resource but also to famine.

As the sandalwood industry declined, Hawai’i became the base for the north-central Pacific whaling trade. The impetus for the new trade was the 1818 discovery of the “Offshore Ground” west of Peru and the 1820 discovery of rich sperm whale grounds off the coast of Japan. The first whaling ship visited the Islands in 1820, and by the late 1820s over 150 whaling ships were stopping in Hawai’i annually. While ship visits declined somewhat during the 1830s, by 1843 over 350 whaling ships annually visited the two major ports of Honolulu and Lahaina. Through the 1850s over 500 whaling ships visited Hawai’i annually. The demise of the Pacific whaling fleet during the U.S. Civil War and the rapid rise of the petroleum industry led to steep declines in the number of ships visiting Hawai’i, and after 1870 only a trickle of ships continued to visit.

Missionaries and Land Tenure

In 1819, King Kamehameha’s successor, Liholiho, abandoned the system of religious practices known as the kapu system and ordered temples (heiau) and images of the gods desecrated and burnt. In April 1820, missionaries from New England arrived and began filling the religious void with conversions to protestant Christianity. Over the next two decades as church attendance became widespread, the missionaries suppressed many traditional Hawaiian cultural practices, operated over 1,000 common schools, and instructed the ali’i in western political economy. The king promulgated a constitution with provisions for a Hawai’i legislature in 1840. It was followed, later in the decade, by laws establishing a cabinet, civil service, and judiciary. Under the 1852 constitution, male citizens received the right to vote in elections for a legislative lower house. Missionaries and other foreigners regularly served in cabinets through the end of the monarchy.

In 1844, the government began a 12-year program, known as the Great Mahele (Division), to dismantle the traditional system of land tenure. King Kauikeaouli gave up his interest in all island lands, retaining ownership only in selected estates. Ali’i had the right to take out fee simple title to lands held at the behest of the king. Maka’ainana had the right to claim fee simple title to small farms (kuleana). At the end of the claiming period, maka’ainana received less than ~40,000 acres of land, while the government (~1.5 million acres), the king (~900,000 acres), and the ali’i (~1.5 million acres) all received substantial shares. Foreigners were initially not allowed to own land in fee simple, but an 1850 law overturned this restriction. By the end of the 19th century, commoners and chiefs had sold, lost, or given up their lands, with foreigners and large estates owning most non-government lands.

Lilikala Kame’eleihiwa (1992) found the origins of the Mahele in the traditional duty of a king to undertake a redistribution of land and the difficulty of such an undertaking during the initial years of missionary influence. By contrast, La Croix and Roumasset (1990) found the origins of the Mahele in the rising value of Hawaii land in sugar cultivation, with fee simple title facilitating investment in the land, irrigation facilities, and processing factories.

Sugar, Immigration, and Population Increase

The first commercially-viable sugar plantation, Ladd and Co., was started on Kaua’i in 1835, and the sugar industry achieved moderate growth through the 1850s. Hawai’i’s sugar exports to California soared during the U.S. Civil War, but the end of hostilities in 1865 also meant the end of the sugar boom. The U.S. tariff on sugar posed a major obstacle to expanding sugar production in Hawai’i during peacetime, as the high tariff, ranging from 20 to 42 percent between 1850 and 1870, limited the extent of profitable sugar cultivation in the islands. Sugar interests helped elect King Kalakaua to the Hawaiian throne over the British-leaning Queen Emma in February 1874, and Kalakaua immediately sought a trade agreement with the United States. The 1876 reciprocity treaty between Hawai’i and the United States allowed duty-free sales of Hawai’i sugar and other selected agricultural products in the United States as well as duty-free sales of most U.S. manufactured goods in Hawai’i. Sugar exports from Hawai’i to the United States soared after the treaty’s promulgation, rising from 21 million pounds in 1876 to 114 million pounds in 1883 to 224.5 million pounds in 1890 (Table 2).

Table 2: Hawai’i Sugar Production (1000 short tons)

Year

Exports

Year

Production

Year

Production

1850

.4

1900

289.5

1950

961

1860

.7

1910

529.9

1960

935.7

1870

9.4

1920

560.4

1970

1162.1

1880

31.8

1930

939.3

1990

819.6

1890

129.9

1940

976.7

1999

367.5

Sources: Data for 1850-1970 are from Schmitt (1977), pp. 418-420. Data for 1990 and 1999 are from http://www.hawaii.gov/dbedt/db99/index.html, Table 22.09. Data for 1850-1880 are exports. Data for 1910-1990 are converted to 96° raw value.

The reciprocity treaty set the tone for Hawai’i’s economy and society over the next 80 years by establishing the sugar industry as the Hawai’i’s leading industry and altering the demographic composition of the Islands via the industry’s labor demands. Rapid expansion of the sugar industry after reciprocity sharply increased its demand for labor: Plantation employment rose from 3,921 in 1872 to 10,243 in 1882 to 20,536 in 1892. The increase in labor demand occurred while the native Hawaiian population continued its precipitous decline, and the Hawai’i government responded to labor shortages by allowing sugar planters to bring in overseas contract laborers bound to serve at fixed wages for 3-5 year periods. The enormous increase in the plantation workforce consisted of first Chinese, then Japanese, then Portuguese contract laborers.

The extensive investment in sugar industry lands and irrigations systems coupled with the rapid influx of overseas contract laborers changed the bargaining positions of Hawai’i and the United States when the reciprocity treaty was due for renegotiation in 1883. La Croix and Christopher Grandy (1997) argued that the profitability of the planters’ new investment was dependent on access to the U.S. market, and this improved the bargaining position of the United States. As a condition for renewal of the treaty, the United States demanded access to Pearl Bay [now Pearl Harbor]. King Kalakaua opposed this demand, and in July 1887, opponents of the government forced the king to accept a new constitution and cabinet. With the election of a new pro-American government in September 1887, the king signed an extension of the reciprocity treaty in October 1887 that granted access rights to Pearl Bay to the United States for the life of the treaty.

Annexation and the Sugar Economy

In 1890, the U.S. Congress enacted the McKinley Tariff, which allowed raw sugar to enter the United States free of duty and established a two-cent per pound bounty for domestic producers. The overall effect of the McKinley Tariff was to completely erase the advantages that the reciprocity treaty had provided to Hawaiian sugar producers over other foreign sugar producers selling in the U.S. market. The value of Hawaiian merchandise exports plunged from $13 million in 1890 to $10 million in 1891 to a low point of $8 million in 1892.

La Croix and Grandy (1997) argued that the McKinley Tariff threatened the wealth of the planters and induced important changes in Hawai’i’s domestic politics. King Kalakaua died in January 1891, and his sister succeeded him. After Queen Lili’uokalani proposed to declare a new constitution in January 1893, a group of U.S. residents, with the incautious assistance of the U.S. Minister and troops from a U.S. warship, overthrew the monarchy. The new government, dominated by the white minority, offered Hawai’i for annexation by the United States from 1893. Annexation was first opposed by U.S. President Cleveland, and then, during U.S. President McKinley’s term, failed to obtain Congressional approval. The advent of the Spanish-American War and the ensuing hostilities in the Philippines raised Hawai’i’s strategic value to the United States, and Hawai’i was annexed by a joint resolution of Congress in July 1898. Hawai’i became a U.S. territory with the passage of the Organic Act on June 14, 1900.

Economic Integration with the United States

In 1900 annexation by the United States eliminated bound labor contracts and freed the existing labor force from their contracts. After annexation, the sugar planters and the Hawaii government recruited workers from Japan, Korea, the Philippines, Spain, Portugal, Puerto Rico, England, Germany, and Russia. The ensuing flood of immigrants swelled the population of the Hawaiian Islands from 109,020 people in 1896 to 232,856 people in 1915. The growth in the plantation labor force was one factor behind the expansion of sugar production from 289,500 short tons in 1900 to 939,300 short tons in 1930. Pineapple production also expanded, from just 2,000 cases of canned fruit in 1903 to 12,808,000 cases in 1931.

La Croix and Price Fishback (2000) established that European and American workers on sugar plantations were paid job-specific wage premiums relative to Asian workers and that the premium paid for unskilled American workers fell by one third between 1901 and 1915 and for European workers by 50 percent or more over the same period. While similar wage gaps disappeared during this period on the U.S. West Coast, Hawai’i plantations were able to maintain a portion of the wage gaps because they constantly found new low-wage immigrants to work in the Hawai’i market. Immigrant workers from Asia failed, however, to climb many rungs up the job ladder on Hawai’i sugar plantations, and this was a major factor behind labor unrest in the sugar industry. Edward Beechert (1985) concluded that large-scale strikes on sugar plantations during 1909 and 1920 improved the welfare of sugar plantation workers but did not lead to recognition of labor unions. Between 1900 and 1941, many sugar workers responded to limited advancement and wage prospects on the sugar plantation by leaving the plantations for jobs in Hawai’i’s growing urban areas.

The rise of the sugar industry and the massive inflow of immigrant workers into Hawaii was accompanied by a decline in the Native Hawaiian population and its overall welfare (La Croix and Rose, 1999). Native Hawaiians and their political representatives argued that government lands should be made available for homesteading to enable Hawaiians to resettle in rural areas and to return to farming occupations. The U.S. Congress enacted legislation in 1921 to reserve specified rural and urban lands for a new Hawaiian Homes Program. La Croix and Louis Rose have argued that the Hawaiian Homes Program has functioned poorly, providing benefits for only a small portion of the Hawaiian population over the course of the twentieth century.

Five firms-Castle & Cooke, Alexander & Baldwin, C. Brewer & Co., Theo. Davies & Co., and American Factors-came to dominate the sugar industry. Originally established to provide financial, labor recruiting, transportation, and marketing services to plantations, they gradually acquired the plantations and also gained control over other vital industries such as banking, insurance, retailing, and shipping. By 1933, their plantations produced 96 percent of the sugar crop. The “Big Five’s” dominance would continue until the rise of the tourism industry and statehood induced U.S. and foreign firms to enter Hawai’i’s markets.

The Great Depression hit Hawai’i hard, as employment in the sugar and pineapple industries declined during the early 1930s. In December 1936, about one-quarter of Hawai’i’s labor force was unemployed. Full recovery would not occur until the military began a buildup in the mid-1930s in reaction to Japan’s occupation of Manchuria. With the Japanese invasion of China in 1937, the number of U.S. military personnel in Hawai’i increased to 48,000 by September 1940.

World War II and its Aftermath

The Japanese attack on the American Pacific Fleet at Pearl Harbor on December 7, 1941 led to a declaration of martial law, a state that continued until October 24, 1944. The war was accompanied by a massive increase in American armed service personnel in Hawai’i, with numbers increasing from 28,000 in 1940 to 378,000 in 1944. The total population increased from 429,000 in 1940 to 858,000 in 1944, thereby substantially increasing the demand for retail, restaurant, and other consumer services. An enormous construction program to house the new personnel was undertaken in 1941 and 1942. The wartime interruption of commercial shipping reduced the tonnage of civilian cargo arriving in Hawai’i by more than 50 percent. Employees working in designated high priority organizations, including sugar plantations, had their jobs and wages frozen in place by General Order 18 which also suspended union activity.

In March 1943, the National Labor Relations Board was allowed to resume operations, and the International Longshoreman’s Union (ILWU) organized 34 of Hawai’i’s 35 sugar plantations, the pineapple plantations, and the longshoremen by November 1945. The passage of the Hawai’i Employment Relations Act in 1945 facilitated union organizing by providing agricultural workers with the same union organizing rights as industrial workers.

After the War, Hawai’i’s economy stagnated, as demobilized armed services personnel left Hawai’i for the U.S. mainland. With the decline in population, real per capita personal income declined at an annual rate of 5.7 percent between 1945 and 1949 (Schmitt, 1976, pp. 148, 167). During this period, Hawai’i’s newly formed unions embarked on a series of disruptive strikes covering West Coast and Hawai’i longshoremen (1946-1949); the sugar industry (1946); and the pineapple industry (1947, 1951). The economy began a nine-year period of moderate expansion in 1949, with the annual growth rate of real personal income averaging 2.3 percent. The expansion of propeller-driven commercial air service sent visitor numbers soaring, from 15,000 in 1946 to 171,367 in 1958, and induced construction of new hotels and other tourism facilities and infrastructure. The onset of the Korean War increased the number of armed service personnel stationed in Hawai’i from 21,000 in 1950 to 50,000 in 1958. Pineapple production and canning also displayed substantial increases over the decade, increasing from 13,697,000 cases in 1949 to 18,613,000 cases in 1956.

Integration and Growth after Statehood

In 1959, Hawai’i became the fiftieth state. The transition from territorial to statehood status was one factor behind the 1958-1973 boom, in which real per capita personal income increased at an annual rate of 4 percent. The most important factor behind the long expansion was the introduction of commercial jet service in 1959, as the jet plane dramatically reduced the money and time costs of traveling to Hawai’i. Also fueled by rapidly rising real incomes in the United States and Japan, the tourism industry would continue its rapid growth through 1990. Visitor arrivals (see Table 3) increased from 171,367 in 1958 to 6,723,531 in 1990. Growth in visitor arrivals was once again accompanied by growth in the construction industry, particularly from 1965 to 1975. The military build-up during the Vietnam War also contributed to the boom by increasing defense expenditures in Hawai’i by 3.9 percent annually from 1958 to 1973 (Schmitt, 1977, pp. 148, 668).

Table 3: Visitor Arrivals to Hawai’i

Year

Visitor Arrivals

Year

Visitor Arrivals

1930

18,651

1970

1,745,904

1940

25,373

1980

3,928,789

1950

46,593

1990

6,723,531

1960

296,249

2000

6,975,866

Source: Hawai’i Tourism Authority, http://www.hawaii.gov/dbedt/monthly/historical-r.xls at Table 5 and http://www.state.hi.us/dbedt/monthly/index2k.html.

From 1973 to 1990, growth in real per capita personal income slowed to 1.1 percent annually. The defense and agriculture sectors stagnated, with most growth generated by the relentless increase in visitor arrivals. Japan’s persistently high rates of economic growth during the 1970s and 1980s spilled over to Hawai’i in the form of huge increases in the numbers of Japanese tourists and in the value of Japanese foreign investment in Hawai’i. At the end of the 1980s, the Hawai’i unemployment rate was just 2-3 percent, employment had been steadily growing since 1983, and prospects looked good for continued expansion of both tourism and the overall economy.

The Malaise of the 1990s

From 1991 to 1998, Hawai’i’s economy was hit by several negative shocks. The 1990-1991 recession in the United States, the closure of California military bases and defense plants, and uncertainty over the safety of air travel during the 1991 Gulf War combined to reduce visitor arrivals from the United States in the early and mid-1990s. Volatile and slow growth in Japan throughout the 1990s led to declines in Japanese visitor arrivals in the late 1990s. The ongoing decline in sugar and pineapple production gathered steam in the 1990s, with only a handful of plantations still in business by 2001. The cumulative impact of these adverse shocks was severe, as real per capita personal income did not change between 1991 and 1998.

The recovery continued through summer 2001 despite a slowing U.S. economy. It came to an abrupt halt with the terrorism attack of September 11, 2001, as domestic and foreign tourism declined sharply.

References

Beechert, Edward D. Working in Hawaii: A Labor History. Honolulu: University of Hawaii Press, 1985.

Bushnell, Andrew F. “The ‘Horror’ Reconsidered: An Evaluation of the Historical Evidence for Population Decline in Hawai’i, 1778-1803.” Pacific Studies 16 (1993): 115-161.

Daws, Gavan. Shoal of Time: A History of the Hawaiian Islands. Honolulu: University of Hawaii Press, 1968.

Dye, Tom. “Population Trends in Hawai’i before 1778.” The Hawaiian Journal of History 28 (1994): 1-20.

Hitch, Thomas Kemper. Islands in Transition: The Past, Present, and Future of Hawaii’s Economy. Honolulu: First Hawaiian Bank, 1992.

Kame’eleihiwa, Lilikala. Native Land and Foreign Desires: Pehea La E Pono Ai? Honolulu: Bishop Museum Press, 1992.

Kirch, Patrick V. Feathered Gods and Fishhooks: An Introduction to Hawaiian Archaeology and Prehistory. Honolulu: University of Hawaii Press, 1985.

Kuykendall, Ralph S. A History of the Hawaiian Kingdom. 3 vols. Honolulu: University of Hawaii Press, 1938-1967.

La Croix, Sumner J., and Price Fishback. “Firm-Specific Evidence on Racial Wage Differentials and Workforce Segregation in Hawaii’s Sugar Industry.” Explorations in Economic History 26 (1989): 403-423.

La Croix, Sumner J., and Price Fishback. “Migration, Labor Market Dynamics, and Wage Differentials in Hawaii’s Sugar Industry.” Advances in Agricultural Economic History 1 (2000): 31-72.

La Croix, Sumner J., and Christopher Grandy. “The Political Instability of Reciprocal Trade and the Overthrow of the Hawaiian Kingdom.” Journal of Economic History 57 (1997): 161-189.

La Croix, Sumner J., and Louis A. Rose. “The Political Economy of the Hawaiian Homelands Program.” In The Other Side of the Frontier: Economic Explorations into Native American History, edited by Linda Barrington. Boulder, Colorado: Westview Press, 1999.

La Croix, Sumner J., and James Roumasset. “An Economic Theory of Political Change in Pre-Missionary Hawaii.” Explorations in Economic History 21 (1984): 151-168.

La Croix, Sumner J., and James Roumasset. “The Evolution of Property Rights in Nineteenth-Century Hawaii.” Journal of Economic History 50 (1990): 829-852.

Morgan, Theodore. Hawaii, A Century of Economic Change: 1778-1876. Cambridge, MA: Harvard University Press, 1948.

Schmitt, Robert C. Historical Statistics of Hawaii. Honolulu: University Press of Hawaii, 1977.

Citation: La Croix, Sumner. “Economic History of Hawai’i”. EH.Net Encyclopedia, edited by Robert Whaples. September 27, 2001. URL http://eh.net/encyclopedia/economic-history-of-hawaii/

An Economic History of Finland

Riitta Hjerppe, University of Helsinki

Finland in the early 2000s is a small industrialized country with a standard of living ranked among the top twenty in the world. At the beginning of the twentieth century it was a poor agrarian country with a gross domestic product per capita less than half of that of the United Kingdom and the United States, world leaders at the time in this respect. Finland was part of Sweden until 1809, and a Grand Duchy of Russia from 1809 to 1917, with relatively broad autonomy in its economic and many internal affairs. It became an independent republic in 1917. While not directly involved in the fighting in World War I, the country went through a civil war during the years of early independence in 1918, and fought against the Soviet Union during World War II. Participation in Western trade liberalization and bilateral trade with the Soviet Union required careful balancing of foreign policy, but also enhanced the welfare of the population. Finland has been a member of the European Union since 1995, and has belonged to the European Economic and Monetary Union since 1999, when it adopted the euro as its currency.

Gross Domestic Product per capita in Finland and in EU 15, 1860-2004, index 2004 = 100

Sources: Eurostat (2001–2005)

Finland has large forest areas of coniferous trees, and forests have been and still are an important natural resource in its economic development. Other natural resources are scarce: there is no coal or oil, and relatively few minerals. Outokumpu, the biggest copper mine in Europe in its time, was depleted in the 1980s. Even water power is scarce, despite the large number of lakes, because of the small height differences. The country is among the larger ones in Europe in area, but it is sparsely populated with 44 people per square mile, 5.3 million people altogether. The population is very homogeneous. There are a small number of people of foreign origin, about two percent, and for historical reasons there are two official language groups, the Finnish-speaking majority and a Swedish-speaking minority. In recent years population has grown at about 0.3 percent per year.

The Beginnings of Industrialization and Accelerating Growth

Finland was an agrarian country in the 1800s, despite poor climatic conditions for efficient grain growing. Seventy percent of the population was engaged in agriculture and forestry, and half of the value of production came from these primary industries in 1900. Slash and burn cultivation finally gave way to field cultivation during the nineteenth century, even in the eastern parts of the country.

Some iron works were founded in the southwestern part of the country in order to process Swedish iron ore as early as in the seventeenth century. Significant tar burning, sawmilling and fur trading brought cash with which to buy a few imported items such as salt, and some luxuries – coffee, sugar, wines and fine cloths. The small towns in the coastal areas flourished through the shipping of these items, even if restrictive legislation in the eighteenth century required transport via Stockholm. The income from tar and timber shipping accumulated capital for the first industrial plants.

The nineteenth century saw the modest beginnings of industrialization, clearly later than in Western Europe. The first modern cotton factories started up in the 1830s and 1840s, as did the first machine shops. The first steam machines were introduced in the cotton factories and the first rag paper machine in the 1840s. The first steam sawmills were allowed to start only in 1860. The first railroad shortened the traveling time from the inland towns to the coast in 1862, and the first telegraphs came at around the same time. Some new inventions, such as electrical power and the telephone, came into use early in the 1880s, but generally the diffusion of new technology to everyday use took a long time.

The export of various industrial and artisan products to Russia from the 1840s on, as well as the opening up of British markets to Finnish sawmill products in the 1860s were important triggers of industrial development. From the 1870s on pulp and paper based on wood fiber became major export items to the Russian market, and before World War I one-third of the demand of the vast Russian empire was satisfied with Finnish paper. Finland became a very open economy after the 1860s and 1870s, with an export share equaling one-fifth of GDP and an import share of one-fourth. A happy coincidence was the considerable improvement in the terms of trade (export prices/import prices) from the late 1860s to 1900, when timber and other export prices improved in relation to the international prices of grain and industrial products.

Openness of the economies (exports+imports of goods/GDP, percent) in Finland and EU 15, 1960-2005

Sources: Heikkinen and van Zanden 2004; Hjerppe 1989.

Finland participated fully in the global economy of the first gold-standard era, importing much of its grain tariff-free and a lot of other foodstuffs. Half of the imports consisted of food, beverages and tobacco. Agriculture turned to dairy farming, as in Denmark, but with poorer results. The Finnish currency, the markka from 1865, was tied to gold in 1878 and the Finnish Senate borrowed money from Western banking houses in order to build railways and schools.

GDP grew at a slightly accelerating average rate of 2.6 percent per annum, and GDP per capita rose 1.5 percent per year on average between 1860 and 1913. The population was also growing rapidly, and from two million in the 1860s it reached three million on the eve of World War I. Only about ten percent of the population lived in towns. The investment rate was a little over 10 percent of GDP between the 1860s and 1913 and labor productivity was low compared to the leading nations. Accordingly, economic growth depended mostly on added labor inputs, as well as a growing cultivated area.

Catching up in the Interwar Years

The revolution of 1917 in Russia and Finland’s independence cut off Russian trade, which was devastating for Finland’s economy. The food situation was particularly difficult as 60 percent of grain required had been imported.

Postwar reconstruction in Europe and the consequent demand for timber soon put the economy on a swift growth path. The gap between the Finnish economy and Western economies narrowed dramatically in the interwar period, although it remained the same among the Scandinavian countries, which also experienced fast growth: GDP grew by 4.7 percent per annum and GDP per capita by 3.8 percent in 1920–1938. The investment rate rose to new heights, which also improved labor productivity. The 1930s depression was milder than in many other European countries because of the continued demand for pulp and paper. On the other hand, Finnish industries went into depression at different times, which made the downturn milder than it would have been if all the industries had experienced their troughs simultaneously. The Depression, however, had serious and long-drawn-out consequences for poor people.

The land reform of 1918 secured land for tenant farmers and farm workers. A large number of new, small farms were established, which could only support families if they had extra income from forest work. The country remained largely agrarian. On the eve of World War II, almost half of the labor force and one-third of the production were still in the primary industries. Small-scale agriculture used horses and horse-drawn machines, lumberjacks went into the forest with axes and saws, and logs were transported from the forest by horses or by floating. Tariff protection and other policy measures helped to raise the domestic grain production to 80–90 percent of consumption by 1939.

Soon after the end of World War I, Finnish sawmill products, pulp and paper found old and new markets in the Western world. The structure of exports became more one-sided, however. Textiles and metal products found no markets in the West and had to compete hard with imports on the domestic market. More than four-fifths of exports were based on wood, and one-third of industrial production was in sawmilling, other wood products, pulp and paper. Other growing industries included mining, basic metal industries and machine production, but they operated on the domestic market, protected by the customs barriers that were typical of Europe at that time.

The Postwar Boom until the 1970s

Finland came out of World War II crippled by the loss of a full tenth of its territory, and with 400.000 evacuees from Karelia. Productive units were dilapidated and the raw material situation was poor. The huge war reparations to the Soviet Union were the priority problem of the decision makers. The favorable development of the domestic machinery and shipbuilding industries, which was based on domestic demand during the interwar period and arms deliveries to the army during the War made war-reparations deliveries possible. They were paid on time and according to the agreements. At the same time, timber exports to the West started again. Gradually the productive capacity was modernized and the whole industry was reformed. Evacuees and soldiers were given land on which to settle, and this contributed to the decrease in farm size.

Finland became part of the Western European trade-liberalization movement by joining the World Bank, the International Monetary Fund (IMF) and the Bretton Woods agreement in 1948, becoming a member of the General Agreement on Tariffs and Trade (GATT) two years later, and joining Finnefta (an agreement between the European Free Trade Area (EFTA) and Finland) in 1961. The government chose not to receive Marshall Aid because of the world political situation. Bilateral trade agreements with the Soviet Union started in 1947 and continued until 1991. Tariffs were eased and imports from market economies liberated from 1957. Exports and imports, which had stayed at internationally high levels during the interwar years, only slowly returned to the earlier relative levels.

The investment rate climbed to new levels soon after War World II under a government policy favoring investments and it remained on this very high level until the end of the 1980s. The labor-force growth stopped in the early 1960s, and economic growth has since depended on increases in productivity rather than increased labor inputs. GDP growth was 4.9 percent and GDP per capita 4.3 percent in 1950–1973 – matching the rapid pace of many other European countries.

Exports and, accordingly, the structure of the manufacturing industry were diversified by Soviet and, later, on Western orders for machinery products including paper machines, cranes, elevators, and special ships such as icebreakers. The vast Soviet Union provided good markets for clothing and footwear, while Finnish wool and cotton factories slowly disappeared because of competition from low-wage countries. The modern chemical industry started to develop in the early twentieth century, often led by foreign entrepreneurs, and the first small oil refinery was built by the government in the 1950s. The government became actively involved in industrial activities in the early twentieth century, with investments in mining, basic industries, energy production and transmission, and the construction of infrastructure, and this continued in the postwar period.

The new agricultural policy, the aim of which was to secure reasonable incomes and favorable loans to the farmers and the availability of domestic agricultural products for the population, soon led to overproduction in several product groups, and further to government-subsidized dumping on the international markets. The first limitations on agricultural production were introduced at the end of the 1960s.

The population reached four million in 1950, and the postwar baby boom put extra pressure on the educational system. The educational level of the Finnish population was low in Western European terms in the 1950s, even if everybody could read and write. The underdeveloped educational system was expanded and renewed as new universities and vocational schools were founded, and the number of years of basic, compulsory education increased. Education has been government run since the 1960s and 1970s, and is free at all levels. Finland started to follow the so-called Nordic welfare model, and similar improvements in health and social care have been introduced, normally somewhat later than in the other Nordic countries. Public child-health centers, cash allowances for children, and maternity leave were established in the 1940s, and pension plans have covered the whole population since the 1950s. National unemployment programs had their beginnings in the 1930s and were gradually expanded. A public health-care system was introduced in 1970, and national health insurance also covers some of the cost of private health care. During the 1980s the income distribution became one of the most even in the world.

Slower Growth from the 1970s

The oil crises of the 1970s put the Finnish economy under pressure. Although the oil reserves of the main supplier, the Soviet Union, showed no signs of running out, the price increased in line with world market prices. This was a source of devastating inflation in Finland. On the other hand, it was possible to increase exports under the terms of the bilateral trade agreement with the Soviet Union. This boosted export demand and helped Finland to avoid the high and sustained unemployment that plagued Western Europe.

Economic growth in the 1980s was somewhat better than in most Western economies, and at the end of the 1980s Finland caught up with the sluggishly-growing Swedish GDP per capita for the first time. In the early 1990s the collapse of the Soviet trade, Western European recession and problems in adjusting to the new liberal order of international capital movement led the Finnish economy into a depression that was worse than that of the 1930s. GDP fell by over 10 percent in three years, and unemployment rose to 18 percent. The banking crisis triggered a profound structural change in the Finnish financial sector. The economy revived again to a brisk growth rate of 3.6 percent in 1994-2005: GDP growth was 2.5 percent and GDP per capita 2.1 percent between 1973 and 2005.

Electronics started its spectacular rise in the 1980s and it is now the largest single manufacturing industry with a 25 percent share of all manufacturing. Nokia is the world’s largest producer of mobile phones and a major transmission-station constructor. Connected to this development was the increase in the research-and- development outlay to three percent of GDP, one of the highest in the world. The Finnish paper companies UPM-Kymmene and M-real and the Finnish-Swedish Stora-Enso are among the largest paper producers in the world, although paper production now accounts for only 10 percent of manufacturing output. The recent discussion on the future of the industry is alarming, however. The position of the Nordic paper industry, which is based on expensive, slowly-growing timber, is threatened by new paper factories founded near the expanding consumption areas in Asia and South America, which use local, fast-growing tropical timber. The formerly significant sawmilling operations now constitute a very small percentage of the activities, although the production volumes have been growing. The textile and clothing industries have shrunk into insignificance.

What has typified the last couple of decades is the globalization that has spread to all areas. Exports and imports have increased as a result of export-favoring policies. Some 80 percent of the stocks of Finnish public companies are now in foreign hands: foreign ownership was limited and controlled until the early 1990s. A quarter of the companies operating in Finland are foreign-owned, and Finnish companies have even bigger investments abroad. Most big companies are truly international nowadays. Migration to Finland has increased, and since the collapse of the eastern bloc Russian immigrants have become the largest single foreign group. The number of foreigners is still lower than in many other countries – there are about 120.000 people with foreign background out of a population of 5.3 million.

The directions of foreign trade have been changing because trade with the rising Asian economies has been gaining in importance and Russian trade has fluctuated. Otherwise, almost the same country distribution prevails as has been common for over a century. Western Europe has a share of three-fifths, which has been typical. The United Kingdom was for long Finland’s biggest trading partner, with a share of one-third, but this started to diminish in the 1960s. Russia accounted for one-third of Finnish foreign trade in the early 1900s, but the Soviet Union had minimal trade with the West at first, and its share of the Finnish foreign trade was just a few percentage points. After World War II Soviet-Finnish trade increased gradually until it reached 25 percent of Finnish foreign trade in the 1970s and early 1980s. Trade with Russia is now gradually gaining ground again from the low point of the early 1990s, and had risen to about ten percent in 2006. This makes Russia one of Finland’s three biggest trading partners, Sweden and Germany being the other two with a ten percent share each.

The balance of payments was a continuing problem in the Finnish economy until the 1990s. Particularly in the post-World War II period inflation repeatedly eroded the competitive capacity of the economy and led to numerous devaluations of the currency. An economic policy favoring exports helped the country out of the depression of the 1990s and improved the balance of payments.

Agriculture continued its problematic development of overproduction and high subsidies, which finally became very unpopular. The number of farms has shrunk since the 1960s and the average size has recently risen to average European levels. The share of agricultural production and labor are also on the Western European levels nowadays. Finnish agriculture is incorporated into the Common Agricultural Policy of the European Union and shares its problems, even if Finnish overproduction has been virtually eliminated.

The share of forestry is equally low, even if it supplies four-fifths of the wood used in Finnish sawmills and paper factories: the remaining fifth is imported mainly from the northwestern parts of Russia. The share of manufacturing is somewhat above Western European levels and, accordingly, that of services is high but slightly lower than in the old industrialized countries.

Recent discussion on the state of the economy mainly focuses on two issues. The very open economy of Finland is very much influenced by the rather sluggish economic development of the European Union. Accordingly, not very high growth rates are to be expected in Finland either. Since the 1990s depression, the investment rate has remained at a lower level than was common in the postwar period, and this is cause for concern.

The other issue concerns the prominent role of the public sector in the economy. The Nordic welfare model is basically approved of, but the costs create tensions. High taxation is one consequence of this and political parties discuss whether or not the high public-sector share slows down economic growth.

The aging population, high unemployment and the decreasing numbers of taxpayers in the rural areas of eastern and central Finland place a burden on the local governments. There is also continuing discussion about tax competition inside the European Union: how does the high taxation in some member countries affect the location decisions of companies?

Development of Finland’s exports by commodity group 1900-2005, percent

Source: Finnish National Board of Customs, Statistics Unit

Note on classification: Metal industry products SITC 28, 67, 68, 7, 87; Chemical products SITC 27, 32, 33, 34, 5, 66; Textiles SITC 26, 61, 65, 84, 85; Wood, paper and printed products SITC 24, 25, 63, 64, 82; Food, beverages, tobacco SITC 0, 1, 4.

Development of Finland’s imports by commodity group 1900-2005, percent

Source: Finnish National Board of Customs, Statistics Unit

Note on classification: Metal industry products SITC 28, 67, 68, 7, 87; Chemical products SITC 27, 32, 33, 34, 5, 66; Textiles SITC 26, 61, 65, 84, 85; Wood, paper and printed products SITC 24, 25, 63, 64, 82; Food, beverages, tobacco SITC 0, 1, 4.

References:

Heikkinen, S. and J.L van Zanden, eds. Explorations in Economic Growth. Amsterdam: Aksant, 2004.

Heikkinen, S. Labour and the Market: Workers, Wages and Living Standards in Finland, 1850–1913. Commentationes Scientiarum Socialium 51 (1997).

Hjerppe, R. The Finnish Economy 1860–1985: Growth and Structural Change. Studies on Finland’s Economic Growth XIII. Helsinki: Bank of Finland Publications, 1989.

Jalava, J., S. Heikkinen and R. Hjerppe. “Technology and Structural Change: Productivity in the Finnish Manufacturing Industries, 1925-2000.” Transformation, Integration and Globalization Economic Research (TIGER), Working Paper No. 34, December 2002.

Kaukiainen, Yrjö. A History of Finnish Shipping. London: Routledge, 1993.

Myllyntaus, Timo. Electrification of Finland: The Transfer of a New Technology into a Late Industrializing Economy. Worcester, MA: Macmillan, Worcester, 1991.

Ojala, J., J. Eloranta and J. Jalava, editors. The Road to Prosperity: An Economic History of Finland. Helsinki: Suomalaisen Kirjallisuuden Seura, 2006.

Pekkarinen, J. and J. Vartiainen. Finlands ekonomiska politik: den långa linjen 1918–2000, Stockholm: Stiftelsen Fackföreningsrörelsens institut för ekonomisk forskning FIEF, 2001.

Citation: Hjerppe, Riitta. “An Economic History of Finland”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/an-economic-history-of-finland/

Education and Economic Growth in Historical Perspective

David Mitch, University of Maryland Baltimore County

In his introduction to the Wealth of Nations, Adam Smith (1776, p. 1) states that the proportion between the annual produce of a nation and the number of people who are to consume that produce depends on “the skill, dexterity, and judgment with which its labour is generally applied.” In recent decades, analysts of economic productivity in the United States during the twentieth century have made allowance for Smith’s “skill, dexterity, and judgment” of the labor force under the rubric of labor force quality (Ho and Jorgenson 1999; Aaronson and Sullivan 2001; DeLong, Goldin, and Katz 2003). These studies have found that a variety of factors have influenced labor force quality in the U.S., including age structure and workforce experience, female labor force participation, and immigration. One of the most important determinants of labor force quality has been years of schooling completed by the labor force.

Data limitations complicate generalizing these findings to periods before the twentieth century and to geographical areas beyond the United States. However, the rise of modern economic growth over the last few centuries seems to roughly coincide with the rise of mass schooling throughout the world. The sustained growth in income per capita evidenced in much of the world over the past two to two and a half centuries is a marked divergence from previous tendencies. Kuznets (1966) used the phrase “modern economic growth” to describe this divergence and he placed its onset in the mid-eighteenth century. More recently, Maddison (2001) has placed the start of sustained economic growth in the early nineteenth century. Maddison (1995) estimates that per capita income between 1520 and 1992 increased some eight times for the world as a whole and up to seventeen times for certain regions. Popular schooling was not widespread anywhere in the world before 1600. By 1800, most of North America, Scandinavia, and Germany had achieved literacy rates well in excess of fifty percent. In France and England literacy rates were closer to fifty percent and school attendance before the age of ten was certainly widespread, if not yet the rule. It was not until later in the nineteenth century and the early twentieth century that Southern and Eastern Europe were to catch up with Western Europe and it was only the first half of the twentieth century that saw schooling become widespread through much of Asia and Latin America. Only later in the twentieth century did schooling begin to spread throughout Africa. The twentieth century has seen the spread of secondary and university education to much of the adult population in the United States and to a lesser extent in other developed countries.[2] However, correlation is not causation; rising income per capita may have contributed to rising levels of schooling, as well as schooling to income levels. Thus, the contribution of rising schooling to economic growth should be examined more directly.

Estimating the Contribution of the Rise of Mass Schooling to Economic Growth: A Growth Accounting Perspective

Growth accounting can be used to estimate the general bounds of the contribution the rise of schooling has made to economic growth over the past few centuries.[3] A key assumption of growth accounting is that factors of production are paid their social marginal products. Growth accounting starts with estimates of the growth of individual factors of production, as well as the shares of these factors in total output and estimates of the growth of total product. It then apportions the growth in output into that attributable to growth in each factor of production specified in the analysis and into that due to a residual that cannot otherwise be explained. Estimates of how much schooling has increased the productivity of individual workers, combined with estimates of the increase in schooling completed by the labor force, yield estimates of how much the increase in schooling has contributed to increasing output. A growth accounting approach offers the advantage that with basic estimates (or at least possible ranges) for trends in output, labor force, schooling attainment, and preferably capital stock and factor shares, it yields estimates of schooling’s contribution to economic growth. An important disadvantage is that it relies on indirect estimates at the micro level for how schooling influences productivity at the aggregate level, rather than on direct empirical evidence.[4]

Back-of-the-envelope estimates of increases in income per capita attributable to rising levels of education over a period of a few centuries can be obtained by considering possible ranges of levels of schooling increases as measured in average years of schooling along with possible ranges of rates of return per year of schooling, in terms of the percentage by which a year of schooling raises earnings and common ranges for labor’s share in national income. By using a Cobb-Douglas specification of the aggregate production function with two factors of production, labor and physical capital, one can arrive at the following equation for the ratio between final and initial national income per worker due to increases in average school years completed between the two time periods:

1) (Y/L)1/ (Y/L)0 = ( (1 + r )S1 - S0 )α

Where Y = output, L = the labor force, r = the percent by which a year of schooling increases labor productivity, S is the average years of schooling completed by the labor force in each time period, α is labor’s share in national income, and the subscripts 0 and 1 denote the initial and final time period over which the schooling changes occur.[5] This formulation is a partial equilibrium one, holding constant the level of physical capital. However, the level of physical capital should be expected to increase in response to improved labor force quality due to more schooling. A common specification of a growth model that allows for such responses of physical capital implies the following ratio between final and initial national income per worker (see Lord 2001, 99-100):

2) (Y/L)1/ (Y/L)0 = ( (1 + r )S1 - S0 )

The bounds on increases in years of schooling can be placed at between zero and 16, that is, between a completely unschooled and presumably illiterate population to one in which a college education is universal. As bounds on returns to increasing earnings per year of schooling, one can employ Krueger and Lindahl’s (2001) survey of results from recent estimates of earnings functions, which finds that returns range from 5 percent to 15 percent. The implications of varying these two parameters are reported in Tables 1A and 1B. Table 1A reports estimates based on the partial equilibrium specification holding constant the level of physical capital in equation 1). Table 1B reports estimates allowing for a changing level of physical capital as in equation 2). Labor’s share of income has been set at a commonly used value of 0.7 (see DeLong, Goldin and Katz 2003, 29; Maddison 1995, 255).

Table 1A
Increase in per Capita Income over a Base Level of 1 Attributable to Hypothetical Increases in Average Schooling Levels — Holding the Physical Capital Stock Constant

Percent Increase in Earnings per Extra Year of Schooling
Increase in Average
Years of Schooling
5% 10% 15%
1 1.035 1.07 1.10
3 1.11 1.22 1.34
6 – illiteracy to
universal grammar school
.23 1.49 1.80
12 – illiteracy to
universal high school
1.51 2.23 3.23
16 – illiteracy to
universal college
1.73 2.91 4.78

Table 1B
Increase in per Capita Income over a Base Level of 1 Attributable to Hypothetical Increases in Average Schooling Levels — Allowing for Steady-state Changes in the Physical Capital Stock

Percent Increase in Earnings per Extra Year of Schooling
Increase in Average
Years of Schooling
5% 10% 15%
1 1.05 1.10 1.15
3 1.16 1.33 1.52
6 – illiteracy to
universal grammar school
1.34 1.77 2.31
12 – illiteracy to
universal high school
1.79 3.14 5.35
16 – illiteracy to
universal college
2.18 4.59 9.36

The back-of-the-envelope calculations in Tables 1A and 1B make two simple points. First, schooling increases have the potential to explain a good deal of estimated long-term increases in per capita income. With the average member of an economy’s labor force embodying investments of twelve years of schooling and a moderate ten-percent rate of return per year of schooling and no increase in the capital stock, at least 17 percent of Maddison’s eight-fold increase in per capita income can be accounted for (i.e. 1.23/7) by rising schooling. Indeed, a 16 year schooling increase allowing for steady-state capital stock increases and at 15 percent per year return overexplains Maddison’s eight-fold increase (8.36/7). After all, if schooling has had substantial effects on the productivity of individual workers, if a sizable share of the labor force has experienced improvements in schooling completed and with labor’s share of output greater than half, then the contribution of rising schooling to increasing output should be large.

Second, the contribution of schooling increases that have actually occurred historically to per capita income increases is more modest accounting for at best about one fifth of Maddison’s one-fold increase. Thus an increase in average years of schooling completed by the labor force of 6 years, roughly that entailed by the spread of universal grammar schooling, would account for 19 percent (1.31/7) of an eight-fold per capita output increase at a high 15 percent rate of return allowing for steady state changes in the physical capital stock (Table 1B). And at a low 5 percent return per year of schooling, the contribution would be only 5 percent of the increase (0.34/7). Making lower-level elementary education universal would entail increasing average years of schooling completed by the labor force by 1 to 3 years; in most circumstances this is not a trivial accomplishment as measured by the societal resources required. However, even at a high 15 percent per year return and allowing for steady state changes in the capital stock (Table 1B), the contribution of a 3 year increase in average years of schooling would only account for 7 percent (0.52/7) of Maddison’s eight-fold increase.

How do the above proposed bounds on schooling increases compare with possible increases in the physical capital stock? Kendrick (1993, 143) finds a somewhat larger growth rate in his estimated human capital stock than in the stock of non-human capital for the U.S. between 1929 and 1969, though for the sub-period 1929-48, he estimates a slightly higher growth rate for the non-human capital stock. In contrast, Maddison (1995, 35-37) estimates larger increases in the value of non-residential structures per worker and in the value of machinery and equipment per worker than in years of schooling per adult for the U.S. and the U.K. between 1820 and 1992. For the U.S., he estimates that the value of non-residential structures per worker rose by 21 times and the value of machinery and equipment per worker rose by 141 times in comparison with a ten-fold increase in the years of schooling per adult between 1820 and 1992. For the U.K., his estimates indicate a 15 fold increase in the value of structures per worker and a 97 fold increase in value of machinery and equipment per worker in contrast with a seven-fold increase in average years of schooling between 1820 and 1992. It should be noted that these estimates are based on cumulated investments in schooling to estimate human capital; that is, they are based on the costs incurred to produce human capital. Davies and Whalley (1991, 188-189) argue that estimates based on the alternative approach of calculating the present value of future earnings premiums attributable to schooling and other forms of human capital yield substantially higher estimates of human capital due to capturing inframarginal returns above costs accruing to human capital investments. For the growth accounting approach employed here, the cumulated investment or cost approach would seem the appropriate one. Are there more inherent bounds on the accumulation of human capital over time than non-human capital? One limit on the accumulation of human capital is set by how much of one’s potential working life a worker is willing to sacrifice for purposes of improving education and future productivity. This can be compared with the corresponding limit on the willingness to sacrifice current consumption for wealth accumulation.

However, this discussion makes no explicit allowance for changes over time in the quality of schooling. Improvements in teacher training and teacher recruitment along with ongoing curriculum developments among other factors could lead to ongoing improvements over time in how much a year of school attendance would improve the underlying future productivity of the student. Woessmann (2002) and Hanushek and Kimcoe (2000) have recently argued for the importance of allowing for variation in school quality in estimating the impact of cross national variation in human capital levels on economic growth. Woessmann (2002) makes the suggestion that allowing for improvements in the quality of schooling can remove the upper bounds on schooling investment that would be present if this was simply a matter of increasing the percentage of the population enrolled in school at given levels of quality. While there would seem to be inherent bounds on the proportion of one’s life that one is willing to spend in school, such bounds would not apply to increases in expenditures and other means of improving school quality.

Expenditures per pupil appear to have risen markedly over long periods of time. Thus, in the United States, expenditure per pupil in public elementary and secondary schools in constant 1989-90 dollars rose by over 6 times between 1923-24 and 1973-74 (National Center for Educational Statistics, 60). And in Victorian England, nominal expenditures per pupil in state subsidized schools more than doubled between 1870 and 1900, despite falling prices (Mitch 1982, 204). These figures do not control for the rising percentage of students enrolled in higher grade levels (presumably at higher expenditure per student), general rises in living standards affecting teachers’ salaries and other factors influencing the abilities of those recruited into teaching. Nevertheless, they suggest the possibility of sizable improvements over time in school quality.

It can be argued that implicitly allowance is made for improvements in school quality in the rate of return imputed per year of schooling completed on average by the labor force. Insofar as schools became more effective over time in transmitting knowledge and skills, the economic return per year of schooling should have increased correspondingly. Thus any attempt to allow for school quality in a growth accounting analysis should be careful to avoid double counting school quality in both school inputs and in returns per year of schooling.

The benchmark for the impact of increases in average levels of schooling completed in Table 1 are Maddison’s estimates of changes in output per capita over the last two centuries. In fact, major increases in schooling levels have most commonly been compressed into intervals of several decades or less, rather than periods of a century or more. This would imply that the contribution to output growth of improvements in labor force quality due to increases in schooling levels would have been concentrated primarily in periods of marked improvement in schooling levels and would have been far more modest during periods of more sluggish increase in educational attainment. In order to gauge the impact of the time interval over which changes in schooling occur on growth rates of output, Table 2 provides the change in average years of schooling implied by some of the hypothetical changes in average levels of schooling attainment reported in Table 1 for various time periods.

Table 2

Annual Change in Average Years of Schooling per Adult per Year Implied by Hypothetical Figures in Table 1

Time period over which increase occurred
Total Increase in
Average Years of
Schooling per Adult
5 years 10 years 30 years 50 years 100 years
1 0.2 0.1 0.033 0.02 0.01
3 0.6 0.3 0.1 0.06 0.03
6 1.2 0.6 0.2 0.12 0.06
9 1.8 0.9 0.3 0.18 0.09

Table 3 translates these rates of schooling growth into output growth rates using the partial equilibrium framework of equation 1) using a value for the share of labor of 0.7 as above. The contribution of schooling to growth rates of output and output per capita can be calculated as labor’s share times the percentage return per year of schooling on earnings times the annual increase in average years of schooling.

Table 3A
Contribution of Schooling for Large Increases in Schooling to Annual Growth Rates of Output

Length of time for schooling increase 6 year rise in average years of schooling 6 year rise in average years of schooling 9 year rise in average years of schooling 9 year rise in average years of schooling
5% return 10 % return 5 % return 10% return
30 years 0.7% 1.4% 1.05% 2.1%
50 years 0.42% 0.84% 0.63% 1.26%

Table 3B
Contribution of Schooling for Small to Modest Increases in Schooling to Annual Growth Rates of Output

Length of time for schooling increase 1 year rise in average years of schooling 1 year rise in average years of schooling 3 year rise in average years of schooling 3 year rise in average years of schooling
5 % return 10 % return 5% return 10% return
5 years 0.7% 1.4% 2.1% 4.2%
10 years 0.35% 0.7% 1.05% 2.1%
20 years 0.175% 0.35% 0.525% 1.05%
30 years 0.12% 0.23% 0.35% 0.7%
50 years 0.07% 0.14% 0.21% 0.42%
100 years 0.035% 0.07% 0.105% 0.21%

The case of the U.S. in the twentieth century as analyzed in DeLong, Goldin and Katz (2003) offers an example of how apparent limits or at least resistance to ongoing expansion of schooling have lowered the contribution of schooling to growth. They find that between World War I and the end of the century, improvements in labor quality attributable to schooling can account for about a quarter of the growth of output per capita in the U.S. during this period; this is similar in magnitude to Denison’s (1962) estimates for the first part of this period. This era saw the mean years of schooling completed by age 35 increased from 7.4 years for an American born in 1875 to 14.1 years for an American born in 1975 (DeLong, Goldin and Katz 2003, 22). However, in the last two decades of the twentieth century the rate of increase of mean years of schooling completed leveled off and correspondingly the contribution of schooling to labor quality improvements fell almost in half.

Maddison (1995) has compiled estimates of the average years of schooling completed for a number of countries going back to 1820. It is indicative of the sparseness of schooling completed by adult population estimates that Maddison reports estimates for only 3 countries, the U.S., the U.K., and Japan, all the way back to 1820. Maddison’s figures come from other studies and their reliability warrants further critical scrutiny than can be accorded them here. Since systematic census evidence on adult educational attainment did not begin until the mid-twentieth century, estimates of labor force educational attainment prior to 1900 should be treated with some skepticism. Nevertheless, Maddison’s estimates can be used to give a sense of plausible changes in levels of schooling completed over the last century and a half. The average increases in years of schooling per year for various time periods implied by Maddison’s figures are reported in Table 4. Maddison constructed his figures by giving primary education a weight of 1, secondary education a weight of 1.4, and tertiary, a weight of 2 based on evidence on relative earnings for each level of education.

Table 4
Estimates of the Annual Change in Average Years of Schooling per Person aged 15-64 for Selected Countries and Time Periods

Country 1913-1973 1870-1973 1870-1913
U.S. 0 .112 0.107 0.092
France 0.0783
Germany 0.053
Netherlands 0.064
U.K. 0.0473 0.0722 0.102
Japan 0.112 0.106 0.090

Source: Maddison (1995), 37, Table 2-3

Table 5
Annual Growth Rates in GDP per Capita

Region 1820-70 1870-1913 1913-50 1950-73 1973-92
12 West European Countries 0.9 1.3 1.2 3.8 1.8
4 Western Offshoots 1.4 1.5 1.3 2.4 1.2
5 South European Countries n.a. 0.9 0.7 4.8 2.2
7 East European Countries n.a. 1.2 1.0 4.0 -0.8
7 Latin American Countries n.a. 1.5 1.9 2.4 0.4
11 Asian Countries 0.1 0.7 -0.2 3.1 3.5
10 African countries n.a. n.a. 1.0 1.8 -0.4

Source: Maddison (1995), 62-63, Table 3-2.

In comparing Tables 2 and 4 it can be observed that the estimated actual changes in years of schooling compiled by Maddison (as well as the average over 55 countries reported by Lichtenberg (1994) for the third quarter of the twentieth century) fall within a lower bound set in the hypothetical ranges of a 3 year increase in average schooling spread over a century and an upper bound set by a 6 year increase in average schooling spread over 50 years.

Equations 1) and 2) above assume that each year of schooling of a worker has the same impact on productivity. In fact it has been common to find that the impact of schooling on productivity varies according to level of education. While the rate of return as a percentage of costs tends to be higher for primary than secondary schooling, which is in turn higher than tertiary education, this reflects the far lower costs, especially lower foregone earnings, of primary schooling (Psacharopolous and Patrinos 2004). The earnings premium per year of schooling tends to be higher for higher levels of education and this earnings premium, rather than the rate of return as a percentage costs, is the appropriate measure for assessing the contribution of rising schooling to growth (OECD 2001). Accordingly growth accounting analyses commonly construct schooling indexes weighting years of schooling according to estimates of each year’s impact on earnings (see for example Maddison 1995; Denison 1962). DeLong, Goldin and Katz (2003) use chain weighted indexes of returns according to each level of schooling. A rough approximation of the effect of allowing for variation in economic impact by level of schooling in the analysis in Table 1 is simply to focus on the mid-range 10 percent rate of return as an approximate average of high, low, and medium level returns.[6]

The U.S. is notable for rapid expansion in schooling attainment over the twentieth century at both the secondary and tertiary level, while in Europe widespread expansion has tended to focus on the primary and lower secondary level. These differences are evident in Denison’s estimates of the actual differences in educational distribution between the United States and a number of Western European countries in the mid-twentieth century (see Table 6).

Table 6

Percentage Distributions of the Male Labor Force by Years of Schooling Completed

Years of School Completed United States 1957 France 1954 United Kingdom 1951 Italy 1961
0 1.4 0.3 0.2 13.7
1-4 5.7 2.4 0.2 26.1
5-6 6.3 19.2 0.8 38.0
7 5.8 21.1 4.0 4.2
8 17.2 27.8 27.2 8.1
9 6.3 4.6 45.1 0.7
10 7.3 4.1 8.4 0.7
11 6.0 6.5 7.3 0.6
12 26.2 5.4 2.5 1.8
13-15 8.3 5.4 2.2 3.0
16 or more 9.5 3.2 2.1 3.1

Source: Denison (1967), 80, Table 8-1.

Some segments of the population are likely to have much greater enhancements of productivity from additional years of schooling than others. Insofar as the more able benefit from schooling compared to the rest of the ability distribution, putting substantially greater relative emphasis on expansion of higher levels of schooling could considerably augment growth rates over a more egalitarian strategy. This result would follow from a substantially greater premium assigned to higher levels of education. However, some studies of education in developing countries have found that they allocate a disproportionate share of resources to tertiary schooling at the expense of primary schooling, reflecting efforts of elites to benefit their offspring. How this has impeded economic growth would depend on the disparity in rates of return among levels of education, a point of some controversy in the economics of education literature (Birdsall 1996; Psacharopoulos 1996).

While allocating schooling disproportionately towards the more able in a society may have promoted growth, there would have been corresponding losses stemming from groups that have been systematically excluded or at least restricted in their access to education due to discrimination by factors such as race, gender and religion (Margo 1990). These losses could be attributed in part to the presence of individuals of high ability in groups experiencing discrimination due to failure to provide them with sufficient education to properly utilize their talents. However, historians such as Ashton (1948, 15) have argued that the exclusion of non-Anglicans from English universities prior to the mid-nineteenth century resulted in the channeling of their talents into manufacturing and commerce.

Even if returns have been higher at some levels of education than others, a sustained and substantial increase in labor force quality would seem to entail an egalitarian strategy of widespread increase in access to schooling. The contrast between the rapid increase in access to secondary and tertiary schooling in the U.S. and the much more limited increase in access in Europe during the twentieth century with the correspondingly much greater role for schooling in accounting for economic growth in the U.S. than in Europe (see Denison 1967) points to the importance of an egalitarian strategy in sustaining ongoing increases in aggregate labor force quality.

One would expect on increase in the relative supply of more schooled labor to lead to a decline in the premium to schooling, other things equal. Some recent analyses of the contribution of schooling to growth have allowed for this by specifying a parametric relationship between the distribution of schooling in an economy’s labor force and its impact on output or on a hypothesized intermediary human capital factor (Bils and Klenow 2000).[7]

Direct empirical evidence on trends in the premium to schooling is helpful both to obviate reliance on a theoretical specification and to allow for factors such as technical change that may have offset the impact of the increasing supply of schooling. Goldin and Katz (2001) have developed evidence on trends in the premium to schooling over the twentieth century that have allowed them to adjust for these trends in estimating the contribution of schooling to economic growth (DeLong, Goldin and Katz 2003). They find a marked fall in the premium to schooling, roughly falling in half between 1910 and 1950. However, they also find that this decline in the schooling premium was more than offset by their estimated increase over this same period in years of schooling completed by the average worker of 2.9 years and hence that on net schooling increases contributed to improved productivity of the U.S. workforce. They estimate increases of 0.5 percent per year in labor productivity due to increased educational attainment between 1910 and 1950 relative to the average total annual increase in labor productivity of 1.62 percent over the entire period 1915 to 2000. For the period since 1960, DeLong, Goldin and Katz find that the premium to education has increased while the increase in educational attainment at first increased and then declined. During this latter period, the increase in labor force quality has declined, as noted above, despite a widening premium to education, due to the slowing down in the increase in educational attainment.

Classifying the Range of Possible Relationships between Schooling and Economic Growth

In generalizing beyond the twentieth-century U.S. experience, allowance should be made both for the role of influences other than education on economic growth and for the possibility that the impact of education on growth can vary considerably according to the historical situation. In fact to understand why and how education might contribute to economic growth over the range of historical experience, it is important to investigate the variation in the impact of education on growth that has occurred historically. In relating education to economic growth, one can distinguish four basic possibilities.

The first is one of stagnation in both educational attainment and in output per head. Arguably, this was the most common situation throughout the world until 1750 and even after that date characterized Southern and Eastern Europe through the late nineteenth century, as well as most of Africa, Asia, and Latin American through the mid-twentieth century. The qualifier “arguably” is inserted here, because this view of the matter almost surely makes inadequate allowance for the improvements in informal acquisition of skills through family transmission and direct experience as well as through more formal non-schooling channels such as guild-sponsored apprenticeships, an aspect to be taken up further below. It also makes no allowance for the possible long-term improvements in per capita income that took place prior to 1750 but have been inadequately documented. Still focusing on formal schooling as the source of improvement in labor force, there is reason to think that this may have been a pervasive situation throughout much of human history.

The second situation is one in which income per capita rose despite stagnating education levels; factors other than improvements in educational attainment were generating economic growth. England during its industrial revolution, 1750 to 1840 is a notable instance in which some historians have argued that this situation prevailed. During this period, English schooling and literacy rates rose only slightly if at all, while income per capita appears to have risen. Literacy and schooling appears to have been of little use in newly created manufacturing occupations such as in cotton spinning. Indeed, literacy rates and schooling actually appears to have declined in some of the most rapidly industrializing areas of England such as Lancashire (Sanderson 1972; Nicholas and Nicholas 1992). Not all have concurred with this interpretation of the role of education in the English industrial revolution and the result depends on how educational trends are measured and how education is specified as affecting output (see Laqueur; Crafts 1995; Mitch 1999). Moreover this makes no allowance for the role of informal acquisition of skills. Boot (1995) argues that in the case of cotton spinners, informal skill acquisition with experience was substantial.

The simplest interpretation of this situation is that other factors contributed to economic growth other than schooling or human capital more generally. The clearest non-human capital explanatory factor would perhaps be physical capital accumulation; another might be foreign trade. However, if one turns to technological advance as a driving force, then this gives rise to the possibility that human capital — at least broadly defined — was if not the underlying force at least a central contributing factor to the industrial revolution. The argument for this possibility is that the improvements in knowledge and skills associated with technological advance are embodied in human agents and hence are forms of human capital. Recent work by Mokyr (2002) would suggest this interpretation. Nevertheless, the British industrial revolution does remain as a prominent instance in which human capital conventionally defined as schooling stagnated in the presence of a notable upsurge in economic growth. A less extreme case is provided by the post-World War II European catch-up with the United States, as Denison’s (1967) growth accounting analysis indicates that this occurred despite slower European increases in educational attainment due to other factors offsetting this. Historical instances such as that of the British industrial revolution call into question the common assumption that education is a necessary prerequisite for economic growth (see Mitch 1990).

The third situation is one in which rising educational attainment corresponds with rising rates of economic growth. This is the situation one would expect to prevail if education contributes to economic productivity and if any negative factors are not sufficient to offset this influence. One sub-set of instances would be those in which very large and reasonably compressed increases in the educational attainment of the labor force occurred. One important example of this is the twentieth century U.S., with the high school movement followed by increases in college attendance, as noted above. Another would be those of certain East Asian economies since World War II, as documented in the growth accounting analysis by Young (1995) of the substantial contributions of their rising educational attainment to their rapid growth rates. Another sub-set of cases corresponding to more modest increases in schooling can be interpreted as applying either to countries experiencing schooling increases focussed at the elementary level, as in much of Western Europe over the nineteenth century. The so-called literacy campaigns, as in the Soviet Union and Cuba (see Arnove and Graff eds. 1987) in the early and mid-twentieth century with modest improvements in educational attainment over compressed time periods of just a few decades could also be viewed as fitting into this sub-category. However, whether there were increases in output per capita corresponding to these more modest increases in educational attainment remains to be established.

The fourth situation is one in which economic growth has stagnated despite the presence of marked improvements in educational attainment. Possible examples of this situation would include the early rise of literacy in some Northern European areas, such as Scotland and Scandinavia, in the seventeenth and eighteenth centuries (see Houston 1988; Sandberg 1979) and some regions of Africa and Asia in the later twentieth century (see Pritchett 2001). One explanation of this situation is that it reflects instances in which any positive impact of educational attainment is small relative to other influences having an adverse impact. But one can also interpret it as reflecting situations in which incentive structures direct educated people into destructive and transfer activities inimical to economic growth (see North 1990; Baumol 1990; Murphy, Shleifer, and Vishny 1991).

Cross-country studies of the relationship between changes in schooling and growth since 1960 have yielded conflicting results which in itself could be interpreted as supporting the presence of some mix of the four situations just surveyed. A number of studies have found at best a weak relationship between changes in schooling and growth (Pritchett 2001; Bils and Klenow 2000); others have found a stronger relationship (Topel 1999). Much seems to depend on issues of measurement and on how the relationship between schooling and output is specified (Temple 2001b; Woessmann 2002, 2003).

The Determinants of Schooling

Whether education contributes to economic growth can be seen as depending on two factors, the extent to which educational levels improve over time and the impact of education on economic productivity. The first factor is a topic for extended discussion in its own right and no attempt will be made to consider it in depth here. Factors commonly considered include rising income per capita, distribution of political power, and cultural influences (Goldin 2001, Lindert 2004, Mariscal and Sokoloff 2000, Easterlin 1981; Mitch 2004). The issue of endogeneity of determination has often been raised with respect to the determinants of schooling. Thus, it is plausible that rising income contributes to rising levels of schooling and that the spread of mass education can influence the distribution of political power as well as the reverse. While these are important considerations, they are sufficiently complex to warrant extended attention in their own right.[8]

Influences on the Economic Impact of Schooling

Insofar as schooling improves general human intellectual capacities, it could be seen as having a universal impact irrespective of context. However, Rosenzweig (1995; 1999) has noted that the even the general influence of education on individual productivity or adaptability depend on the complexity of the situation. He notes that for agricultural tasks primarily involving physical exertion, no difference in productivity is evident between workers according to education levels; however, in more complex allocative decisions, education does enhance performance. This could account for findings that literacy rates were low among cotton spinners in the British industrial revolution despite findings of substantial premiums to experience (Sanderson 1972; Boot 1995). However, other studies have found literacy to have a substantial positive impact on labor productivity in cotton textile manufacture in the U.S., Italy, and Japan (Bessen 2003; A’Hearn 1998, Saxonhouse 1977) and have suggested a connection between literacy and labor discipline.

A more macro influence is the changing sectoral composition of the economy. It is common to suggest that the service and manufacturing sector have more functional uses for educated labor than the agricultural sector and hence that the shift from agriculture to industry in particular will lead to greater use of educated labor and in turn to require more educated labor forces. However, there are no clear theoretical or empirical grounds for the claim that agriculture makes less use of educated labor than other sectors of the economy. In fact, farmers have often had relatively high literacy rates and there are more obvious functional uses for education in agriculture in keeping accounts and keeping up with technological developments than in manufacturing. Nilsson et al (1999) argue that the process of enclosure in nineteenth-century Sweden, with the increased demands for reading and writing land transfer documents that this entailed, increased the value of literacy in the Swedish agrarian economy. The findings noted above that those in cotton textile occupations associated with early industrialization in Britain had relatively low literacy rates is one indication of the lack of any clear cut ranking across broad economic sectors in the use of educated labor.

Changes in the organization of decision making within major sectors as well as changes in the composition of production within sectors are more likely to have had an impact on demands for educated labor. Thus, within agriculture the extent of centralization or decentralization of decision making, that is the extent to which farm work forces consisted of farmers and large numbers of hired workers or of large numbers of peasants each with scope for making allocative decisions, is likely to have affected the uses made of educated labor in agriculture. Within manufacturing, a given country’s endowment of skilled relative to unskilled labor has been seen as influencing the extent to which openness to trade increases skill premiums, though this entails endogenous determination (Wood 1995).

Technological advance would have tended to boost the demand for more skilled and educated labor if technological advance and skills are complementary, as is often asserted.

However, there is no theoretical reason why technology and skills need be complementary and indeed concepts of directed technological change or induced innovation would suggest that in the presence of relatively high skill premiums, technological advance would be skill saving rather than skill using. Goldin and Katz (1998) have argued that the shift from the factory to continuous processing and batch production associated with the shift of power sources from steam to electricity in the early twentieth century lead to rising technology skill complementarity in U.S. manufacturing. It remains to be established how general this trend has been. It could be related to the distinction made between the dominance in the United States of extensive growth in the nineteenth century due to the growth of factors of production such as labor and capital and the increasing importance of intensive growth in the twentieth century. Intensive growth is often associated with technological advance and a presumed enhanced value for education (Abramovitz and David 2000). Some analysts have emphasized the importance of capital-skill complementarity. For example, Galor and Moav (2003) point to the level of the physical capital stock as a key influence on the return to human capital investment; they suggest that once physical capital stock accumulation surpassed a certain level, the positive impact of human capital accumulation on the return to physical capital became large enough that owners of physical capital came to support the rise of mass schooling. They cite the case of schooling reform in early twentieth century Britain as an example.

Even sharp declines in the premiums to schooling do not preclude a significant impact of education on economic growth. DeLong, Goldin and Katz’s (2003) growth accounting analysis for the twentieth century U.S. makes the point that even at modest positive returns to schooling on the order of 5 percent per year of schooling, with large enough increases in educational attainment, the contribution to growth can be substantial.

Human Capital

Economists have generalized the impact of schooling on labor force quality into the concept of human capital. Human capital refers to the investments that human beings make in themselves to enhance their economic productivity. These investments can take on many forms and include not only schooling but also apprenticeship, a healthy diet, and exercise, among other possibilities. Some economists have even suggested that more amorphous societal factors such as trust, institutional tradition, technological know how and innovation can all be viewed as forms of human capital (Temple 2001a; Topel 1999; Mokyr 2002). Thus broadly defined, human capital would appear as a prime candidate for explaining much of the difference across nations and over time in output and economic growth. However, gaining much insight into the actual magnitudes and the channels of influence by which human capital might influence economic growth requires specification of both the nature and determinants of human capital and how human capital affects aggregate production of an economy.

Much of the literature on human capital and growth makes the implicit assumption that some sort of numerical scale exists for human capital, even if multidimensional and even if unobservable. This in turn implies that it is meaningful to relate levels and changes of human capital to levels of income per capita and rates of economic growth. Given the multiplicity of factors that influence human knowledge and skill and in turn how these influence labor productivity, difficulties would seem likely to arise with attempts to measure aggregate human capital similar to those that have arisen with attempts to specify and measure the nature of human intelligence. Woessmann (2002, 2003) provides useful surveys of some of the issues involved in attempting to specify human capital at the aggregate level appropriate for relating it to economic growth.

One can distinguish between approaches to the measurement of human capital that focus on schooling, as in the discussion above, and those that take a broader view. Broad view approaches try to capture all investments that may have improved human productivity from whatever source, including not just schooling but other productivity enhancing investments, such as on-the-job training. The basic premise of broad view approaches is that for an aggregate economy, the income going to labor over and above what that labor would earn if it were paid the income of an unskilled worker can be viewed as human capital. This measure can be constructed in various ways including as a ratio using unskilled labor earnings as the denominator as in Mulligan and Sala-I-Martin (1997) or using the share of labor income not going as compensation for unskilled labor as in Crafts (1995) and Mitch (2004). Mulligan and Sala-I-Martin (2000) point to some of the major index number problems that can arise in using this approach to aggregate heterogeneous workers.

Crafts and Mitch find that for Britain during its late eighteenth and early nineteenth century industrial revolution between one-sixth and one-fourth of income per capita can be attributed to human capital measured as the share of labor income not going as compensation for unskilled labor.

One approach that has been taken recently to estimate the role of human capital differences in explaining international differences in income per capita is to consider changes in immigrant earnings between origin and destination countries along with differences between immigrant and native workers in the destination country. Olson (1996) suggested that the large increase in earnings of immigrants commonly observed in moving from a low income to a high income country points to a small role for human capital in explaining the wide variation in per capita income across countries. Hendricks (2002) has used differences between immigrant and native earnings in the U.S. to estimate the contribution of otherwise unobserved skill differences to explaining differences in income per capita across countries and finds that they account for only a small part of the latter differences. Hendricks’ approach raises the issue of whether there could be long-term increases in otherwise unobserved skills that could have contributed to economic growth.

The Informal Acquisition of Human Capital

One possible source of such skills is through the informal acquisition of human capital through on-the-job experience. Insofar as work has been common from early adolescence onwards, the issue arises of why the aggregate stock of skills acquired through experience would vary over time and thus influence rates of economic growth. Some types of on-the-job experience which contribute to economic productivity, such as apprenticeship, may entail an opportunity cost and aggregate trends in skill accumulation will be influenced by societal willingness to incur such opportunity costs.

Insofar as schooling continues through adolescence, this can interfere with the accumulation of workforce experience. DeLong, Goldin and Katz (2003) note the tradeoff between rising average years of schooling completed and decreasing years of labor force experience in influencing labor force quality of the U.S. labor force in the last half of the twentieth century. Connolly (2004) has found that informal experience played a relatively greater role in Southern economic growth than for other regions of the United States.

Hansen (1997) has also distinguished the academically-oriented secondary schooling the United States developed in the late nineteenth and early twentieth century from the vocationally-oriented schooling and apprenticeship system that Germany developed over the same time period. Goldin (2001) argues that in the United States the educational system developed general abilities suitable for the greater opportunities for geographical and occupational mobility that prevailed there, while specific vocational training was more suitable for the more restricted mobility opportunities in Germany.

Little evidence exists on whether long-term trends in informal opportunities for skill acquisition have influenced growth rates. However, Smith’s (1776) view of the importance of the division of labor in influencing productivity would suggest that the impact of trends in these opportunities may well have been quite sizable.

Externalities from Education

Economists commonly claim that education yields benefits to society over and above the impact on labor market productivity perceived by the person receiving the education. These benefits can include impacts on economic productivity, such as impacts on technological advance. They can also include non-labor market benefits. Thus McMahon (2002, 11) in his assessment of the social benefits of education includes not only direct effects on economic productivity but also impacts on a) population growth rates and health b) democratization, political stability, and human rights, c) the environment, d) reduction of poverty and inequality, e) crime and drug use, and f) labor force participation. While these effects may appear to involve primarily non-market activity and thus would not be reflected in national output measures and growth rates, factors such as political stability, democratization, population growth, and health have obvious consequences for prospects for long-term growth. However, allowance should be made for the simultaneous influence of the distribution of political power and life expectancy on societal investments in schooling.

For the period since 1960, numerous studies have employed cross country variation in various estimates of human capital and income per capita to directly estimate the impact of human capital on levels of income per capita and growth. A central goal of many such estimates is to see if there are externalities to education on output over and above the private returns estimated from micro data. The results have been conflicting and this has been attributed not only to problems of measurement error but also to differences in specification of human capital and its impact on growth. There does not appear to be strong evidence of large positive externalities to human capital (Temple 2001a). Furthermore, McMahon (2004) reports some empirical specifications which yield substantial indirect long-run effects.

For the period before 1960, limits on the availability of data on schooling and income have limited the use of this empirical regression approach. Thus, any discussion of the impact of externalities of education on production is considerably more conjectural. The central role of government, religious, and philanthropic agencies in the provision of schooling suggests the presence of externalities. Politicians and educators more frequently justified government and philanthropic provision of schooling by its impacts on religious and moral behavior than by any market failure resulting in sub-optimal provision of schooling from the standpoint of maximizing labor productivity. Thus, Adam Smith in his discussion of mass schooling in The Wealth of Nations, places more emphasis on its value to the state in enhancing orderliness and decency while reducing the propensity to popular superstition than on its immediate value in enhancing the economic productivity of the individual worker.

The Impact of the Level of Human Capital on Rates of Economic Growth

The approaches considered thus far relate changes in educational attainment of the labor force to changes in output per worker. An alternative, though not mutually exclusive, approach is to relate the level of educational attainment of an economy’s labor force to its rate of economic growth. The argument for doing so is that a high but unchanging level of educational attainment should contribute to growth by facilitating creativity, innovation and adaptation to change as well as facilitating the ongoing maintenance and improvement of skill in the workforce. Topel (1999) has argued that there may not be any fundamental difference between the two types of approach insofar as ongoing sources of productivity advance and adaptation to change could be viewed as reflecting ongoing improvements in human capital. Nevertheless, some empirical studies based on international data for the late twentieth century have found that a country’s level of educational attainment has a much stronger impact on its rate of economic growth than its rate of improvement in educational attainment (Benhabib and Spiegel 1994).

The paucity of data on schooling attainment has limited the empirical examination of the relationship between levels of human capital and economic growth for periods before the late twentieth century. However, Sandberg (1982) has argued, based on a descriptive comparison of economies in various categories, that those with high levels of schooling in 1850 subsequently experienced faster rates of economic growth. Some studies, such as O’Rourke and Williamson (1997) and Foreman-Peck and Lains (1999), have found that high levels of schooling and literacy have contributed to more rapid rates of convergence for European countries in the late nineteenth century and at the state level for the U.S. over the twentieth century (Connolly 2004).

Bowman and Anderson (1963), a much earlier study based on international evidence for the mid-twentieth century, can be interpreted in the spirit of relating levels of education to subsequent levels of income growth. Their reading of the cross-country relationship between literacy rates and per capita income at mid-twentieth-century was that a threshold of 40 percent adult literacy was required for a country to have a per capita income above 300 1955 dollars. Some have ahistorically projected back this literacy threshold to earlier centuries although the Bowman and Anderson proposal was intended to apply to mid-twentieth century development patterns.

The mechanisms by which the level of schooling would influence the rate of economic growth are problematic to establish. One can distinguish two general possibilities. One would be that higher levels of educational attainment facilitate adaptation and responsiveness to change throughout the workforce. This would be especially important where a large percentage of workers are in decision making positions such as an economy composed largely of small farmers and other small enterprises. The finding of Foster and Rosenzweig (1996) for late twentieth century India that the rate of return to schooling is higher during periods of more rapid technological advance in agriculture would be consistent with this. Likewise, Nilsson et al (1999) find that literacy was important for nineteenth-century Swedish farmers in dealing with enclosure, an institutional change. The other possibility is that higher levels of educational attainment increase the potential pool from which an elite group responsible for innovation can be recruited. This could be viewed as applying specifically to scientific and technical innovation as in Mokyr (2002) and Jones (2002) — but also to technological and industrial leadership more generally (Nelson and Wright 1992) and to facilitating advancement in society by ability irrespective of social origins (Galor and Tsiddon 1997). Recently, Labuske and Baten (2004) have found that international rates of patenting are related to secondary enrollment rates.

Two issues have arisen in the recent theoretical literature regarding specifying relationships between the level of human capital and rates of economic growth. First, Lucas (1988) in an influential model of the impact of human capital on growth, specifies that the rate of growth of human capital formation depends on initial levels of human capital, in other words that parents’ and teachers’ human capital has a direct positive influence on the rate of growth of learners’ human capital. This specification of the impact of the initial level of human capital allows for ongoing and unbounded growth of human capital and through this its ongoing contribution to economic growth. Such ongoing growth of human capital could occur through improvements in the quality of schooling or through enhanced improvements in learning from parents and other informal settings. While it might be plausible to suppose that improved education of teachers will enhance their effectiveness with learners, it seems less plausible to suppose that this enhanced effectiveness will increase unbounded in proportion to initial levels of education (Lord 2001, 82).

A second issue is that insofar as higher levels of human capital contribute to economic growth through increases in research and development activity and innovative activity more generally, one would expect the presence of scale effects. Economies with larger populations holding constant their level of human capital per person should benefit from more overall innovative activity simply because they have more people engaged in innovative activity. Jones (1995) has pointed out that such scale effects seem implausible if one looks at the time series relationship between rates of economic growth and those engaged in innovative activity. In recent decades the growth of the number of scientists, engineers, and others engaged in innovative activity has far outstripped the actual growth of productivity and other indicators of direct impact on innovation. Thus, one should allow for diminishing returns in the relationship between levels of education and technological advance.

Thus, as with schooling externalities, considering the impact of levels of education on growth offers numerous channels of influence leaving the challenge for the historian of ascertaining their quantitative importance in the past.

Conclusion

This survey has considered some of the basic ways in which the rise of mass education has contributed to economic growth in recent centuries. Given their potential influence on labor productivity, levels and changes in schooling and of human capital more generally have the potential for explaining a large share of increases in per capita output over time. However, increases in mass schooling seem to explain a major share of economic growth only over relatively short periods of time, with a more modest impact over longer time horizons. In some situations, such as the United States in the twentieth century, it appears that improvements in the schooling of the labor force have made substantial contributions to economic growth. Yet schooling should not be seen as either a necessary or sufficient condition for generating economic growth. Factors other than education can contribute to economic growth and in their absence, it is not clear that schooling in itself can contribute to economic growth. Moreover, there are likely limits on the extent to which average years of schooling of the labor force can expand, although improvement in the quality of schooling is not so obviously bounded. Perhaps the most obvious avenue through which education has contributed to economic growth is by expanding the rate of technological change. But as has been noted, there are numerous other possible channels of influence ranging from political stability and property rights to life expectancy and fertility. The diversity of these channels point to both the challenges and the opportunities in examining the historical connections between education and economic growth.

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[1] I have received helpful comments on this essay from Mac Boot, Claudia Goldin, Bill Lord, Lant Pritchett, Robert Whaples, and an anonymous referee. At an earlier stage in working through some of this material, I benefited from a quite useful conversation with Nick Crafts. However, I bear sole responsibility for remaining errors and shortcomings.

[2] For a detailed survey of trends in schooling in the early modern and modern period see Graff (1987).

[3] See Barro (1998) for a brief intellectual history of growth accounting.

[4] Blaug (1970) provides an accessible, detailed critique of the assumptions behind Denison’s growth accounting approach and Topel (1999) provides a further discussion of the problems of using a growth accounting approach to measure the contribution of education, especially those due to omitting social externalities.

[5] By using a Cobb-Douglas specification of the aggregate production function, one can arrive at the following equation for the ratio between final and initial national income per worker due to increases in average school years completed between the two time periods, t = 0 and t =1:

Start with the aggregate production function specification:

Y = A K(1-α) [(1+r)S L]α

Y/L = A (K/L)(1-α) [(1+r)S L/L]α

Y/L = A (K/L)(1-α) [(1+r)S]α

Assume that the average years of schooling of the labor force is the only change between t = 0 and t =1; that is, assume no change in the ratio of capital to labor between time periods. Then the ratio of the income per worker in the later time period to the earlier time period will be:

(Y/L)1/ (Y/L)0 = ( (1 + r )S1- S0 )α

Where Y = output, A = a measure of the current state of technology, K = the physical capital stock, L = the labor force, r = the percent by which a year of schooling increases labor productivity, S is the average years of schooling completed by the labor force in each time period, α is labor’s share in national income, and the subscripts 0 and 1 denote initial and final time periods.

As noted above, the derivation above is for a partial equilibrium change in years of schooling of the labor force holding constant the physical capital stock. Allowing for physical capital stock accumulation in response to schooling increases in a Solow-type model implies that the ratio of final to initial output per worker will be

(Y/L)1/ (Y/L)0 = ( (1 + r )S1 - S0 ) .

For a derivation of this see Lord (2001, 99-100). Lord’s derivation differs from that here by specifying the technology parameter A as labor augmenting. Allowing for increases in A over time due to technical change would further increase the contribution to output per worker of additional years of schooling.

[6]To take a specific example, suppose that in the steady-state case of Table 1B, a 5 percent earnings premium per year of schooling is assigned to the first 6 years of schooling, i.e. primary schooling, a 10 percent earnings premium per year is assigned to the next 6 years of schooling, i.e. secondary schooling, and a 15 percent earnings premium per year is assigned to the final 4 years of schooling, that is college. In that case, the impact on steady state income per capita compared with no schooling at all would be (1.05)6x(1.10)6x(1.15)4 = 4.15, compared with the 4.59 in going from no schooling to universal college at a 10 percent rate of return for every year of school completed.

[7] Denison’s standard growth accounting approach assumes that education is labor augmenting and, in particular, that there is an infinite elasticity of substitution between skilled and unskilled labor. This specification is conventional in growth accounting analysis. But another common specification in entering education into aggregate production functions is to specify human capital as a third factor of production along with unskilled labor and physical capital. Insofar as this is done with a Cobb-Douglas production function specification, as is conventional, the implied elasticity of substitution between human capital and either unskilled labor or physical capital is unity. The complementarity between human capital and other inputs this implies will tend to increase the contribution of human capital increases to economic growth by decreasing the tendency for diminishing returns to set in. (For a fuller treatment of the considerations involved see Griliches 1970, Conlisk 1970, Broadberry 2003). For an application of this approach in a historical growth accounting exercise, see Crafts (1995), who finds a fairly substantial contribution of human capital during the English industrial revolution. For a critique of Crafts’ estimates see Mitch (1999).

[8] For an examination of long-run growth dynamics with schooling investments endogenously determined by transfer-constrained family decisions see Lord 2001, 209-213 and Rangazas 2000. Lord and Rangazas find that allowing for the fact that families are credit constrained in making schooling investment decisions is consistent with the time path of interest rates in the U.S. between 1870 and 1970.

Citation: Mitch, David. “Education and Economic Growth in Historical Perspective”. EH.Net Encyclopedia, edited by Robert Whaples. July 26, 2005. URL http://eh.net/encyclopedia/education-and-economic-growth-in-historical-perspective/

An Economic History of Denmark

Ingrid Henriksen, University of Copenhagen

Denmark is located in Northern Europe between the North Sea and the Baltic. Today Denmark consists of the Jutland Peninsula bordering Germany and the Danish Isles and covers 43,069 square kilometers (16,629 square miles). 1 The present nation is the result of several cessions of territory throughout history. The last of the former Danish territories in southern Sweden were lost to Sweden in 1658, following one of the numerous wars between the two nations, which especially marred the sixteenth and seventeenth centuries. Following defeat in the Napoleonic Wars, Norway was separated from Denmark in 1814. After the last major war, the Second Schleswig War in 1864, Danish territory was further reduced by a third when Schleswig and Holstein were ceded to Germany. After a regional referendum in 1920 only North-Schleswig returned to Denmark. Finally, Iceland, withdrew from the union with Denmark in 1944. The following will deal with the geographical unit of today’s Denmark.

Prerequisites of Growth

Throughout history a number of advantageous factors have shaped the Danish economy. From this perspective it may not be surprising to find today’s Denmark among the richest societies in the world. According to the OECD, it ranked seventh in 2004, with income of $29.231 per capita (PPP). Although we can identify a number of turning points and breaks, for the time period over which we have quantitative evidence this long-run position has changed little. Thus Maddison (2001) in his estimate of GDP per capita around 1600 places Denmark as number six. One interpretation could be that favorable circumstances, rather than ingenious institutions or policies, have determined Danish economic development. Nevertheless, this article also deals with time periods in which the Danish economy was either diverging from or converging towards the leading economies.

Table 1:
Average Annual GDP Growth (at factor costs)
Total Per capita
1870-1880 1.9% 0.9%
1880-1890 2.5% 1.5%
1890-1900 2.9% 1.8%
1900-1913 3.2% 2.0%
1913-1929 3.0% 1.6%
1929-1938 2.2% 1.4%
1938-1950 2.4% 1.4%
1950-1960 3.4% 2.6%
1960-1973 4.6% 3.8%
1973-1982 1.5% 1.3%
1982-1993 1.6% 1.5%
1993-2004 2.2% 2.0%

Sources: Johansen (1985) and Statistics Denmark ‘Statistikbanken’ online.

Denmark’s geographical location in close proximity of the most dynamic nations of sixteenth-century Europe, the Netherlands and the United Kingdom, no doubt exerted a positive influence on the Danish economy and Danish institutions. The North German area influenced Denmark both through long-term economic links and through the Lutheran Protestant Reformation which the Danes embraced in 1536.

The Danish economy traditionally specialized in agriculture like most other small and medium-sized European countries. It is, however, rather unique to find a rich European country in the late-nineteenth and mid-twentieth century which retained such a strong agrarian bias. Only in the late 1950s did the workforce of manufacturing industry overtake that of agriculture. Thus an economic history of Denmark must take its point of departure in agricultural development for quite a long stretch of time.

Looking at resource endowments, Denmark enjoyed a relatively high agricultural land-to-labor ratio compared to other European countries, with the exception of the UK. This was significant for several reasons since it, in this case, was accompanied by a comparatively wealthy peasantry.

Denmark had no mineral resources to speak of until the exploitation of oil and gas in the North Sea began in 1972 and 1984, respectively. From 1991 on Denmark has been a net exporter of energy although on a very modest scale compared to neighboring Norway and Britain. The small deposits are currently projected to be depleted by the end of the second decade of the twenty-first century.

Figure 1. Percent of GDP in selected=

Source: Johansen (1985) and Statistics Denmark ’Nationalregnskaber’

Good logistic can be regarded as a resource in pre-industrial economies. The Danish coast line of 7,314 km and the fact that no point is more than 50 km from the sea were advantages in an age in which transport by sea was more economical than land transport.

Decline and Transformation, 1500-1750

The year of the Lutheran Reformation (1536) conventionally marks the end of the Middle Ages in Danish historiography. Only around 1500 did population growth begin to pick up after the devastating effect of the Black Death. Growth thereafter was modest and at times probably stagnant with large fluctuations in mortality following major wars, particularly during the seventeenth century, and years of bad harvests. About 80-85 percent of the population lived from subsistence agriculture in small rural communities and this did not change. Exports are estimated to have been about 5 percent of GDP between 1550 and 1650. The main export products were oxen and grain. The period after 1650 was characterized by a long lasting slump with a marked decline in exports to the neighboring countries, the Netherlands in particular.

The institutional development after the Black Death showed a return to more archaic forms. Unlike other parts of northwestern Europe, the peasantry on the Danish Isles afterwards became a victim of a process of re-feudalization during the last decades of the fifteenth century. A likely explanation is the low population density that encouraged large landowners to hold on to their labor by all means. Freehold tenure among peasants effectively disappeared during the seventeenth century. Institutions like bonded labor that forced peasants to stay on the estate where they were born, and labor services on the demesne as part of the land rent bring to mind similar arrangements in Europe east of the Elbe River. One exception to the East European model was crucial, however. The demesne land, that is the land worked directly under the estate, never made up more than nine percent of total land by the mid eighteenth century. Although some estate owners saw an interest in encroaching on peasant land, the state protected the latter as production units and, more importantly, as a tax base. Bonded labor was codified in the all-encompassing Danish Law of Christian V in 1683. It was further intensified by being extended, though under another label, to all Denmark during 1733-88, as a means for the state to tide the large landlords over an agrarian crisis. One explanation for the long life of such an authoritarian institution could be that the tenants were relatively well off, with 25-50 acres of land on average. Another reason could be that reality differed from the formal rigor of the institutions.

Following the Protestant Reformation in 1536, the Crown took over all church land, thereby making it the owner of 50 percent of all land. The costs of warfare during most of the sixteenth century could still be covered by the revenue of these substantial possessions. Around 1600 the income from taxation and customs, mostly Sound Toll collected from ships that passed the narrow strait between Denmark and today’s Sweden, on the one hand and Crown land revenues on the other were equally large. About 50 years later, after a major fiscal crisis had led to the sale of about half of all Crown lands, the revenue from royal demesnes declined relatively to about one third, and after 1660 the full transition from domain state to tax state was completed.

The bulk of the former Crown land had been sold to nobles and a few common owners of estates. Consequently, although the Danish constitution of 1665 was the most stringent version of absolutism found anywhere in Europe at the time, the Crown depended heavily on estate owners to perform a number of important local tasks. Thus, conscription of troops for warfare, collection of land taxes and maintenance of law and order enhanced the landlords’ power over their tenants.

Reform and International Market Integration, 1750-1870

The driving force of Danish economic growth, which took off during the late eighteenth century was population growth at home and abroad – which triggered technological and institutional innovation. Whereas the Danish population during the previous hundred years grew by about 0.4 percent per annum, growth climbed to about 0.6 percent, accelerating after 1775 and especially from the second decade of the nineteenth century (Johansen 2002). Like elsewhere in Northern Europe, accelerating growth can be ascribed to a decline in mortality, mainly child mortality. Probably this development was initiated by fewer spells of epidemic diseases due to fewer wars and to greater inherited immunity against contagious diseases. Vaccination against smallpox and formal education of midwives from the early nineteenth century might have played a role (Banggård 2004). Land reforms that entailed some scattering of the farm population may also have had a positive influence. Prices rose from the late eighteenth century in response to the increase in populations in Northern Europe, but also following a number of international conflicts. This again caused a boom in Danish transit shipping and in grain exports.

Population growth rendered the old institutional set up obsolete. Landlords no longer needed to bind labor to their estate, as a new class of landless laborers or cottagers with little land emerged. The work of these day-laborers was to replace the labor services of tenant farmers on the demesnes. The old system of labor services obviously presented an incentive problem all the more since it was often carried by the live-in servants of the tenant farmers. Thus, the labor days on the demesnes represented a loss to both landlords and tenants (Henriksen 2003). Part of the land rent was originally paid in grain. Some of it had been converted to money which meant that real rents declined during the inflation. The solution to these problems was massive land sales both from the remaining crown lands and from private landlords to their tenants. As a result two-thirds of all Danish farmers became owner-occupiers compared to only ten percent in the mid-eighteenth century. This development was halted during the next two and a half decades but resumed as the business cycle picked up during the 1840s and 1850s. It was to become of vital importance to the modernization of Danish agriculture towards the end of the nineteenth century that 75 percent of all agricultural land was farmed by owners of middle-sized farms of about 50 acres. Population growth may also have put a pressure on common lands in the villages. At any rate enclosure begun in the 1760s, accelerated in the 1790s supported by legislation and was almost complete in the third decade of the nineteenth century.

The initiative for the sweeping land reforms from the 1780s is thought to have come from below – that is from the landlords and in some instances also from the peasantry. The absolute monarch and his counselors were, however, strongly supportive of these measures. The desire for peasant land as a tax base weighed heavily and the reforms were believed to enhance the efficiency of peasant farming. Besides, the central government was by now more powerful than in the preceding centuries and less dependent on landlords for local administrative tasks.

Production per capita rose modestly before the 1830s and more pronouncedly thereafter when a better allocation of labor and land followed the reforms and when some new crops like clover and potatoes were introduced at a larger scale. Most importantly, the Danes no longer lived at the margin of hunger. No longer do we find a correlation between demographic variables, deaths and births, and bad harvest years (Johansen 2002).

A liberalization of import tariffs in 1797 marked the end of a short spell of late mercantilism. Further liberalizations during the nineteenth and the beginning of the twentieth century established the Danish liberal tradition in international trade that was only to be broken by the protectionism of the 1930s.

Following the loss of the secured Norwegian market for grain in 1814, Danish exports began to target the British market. The great rush forward came as the British Corn Law was repealed in 1846. The export share of the production value in agriculture rose from roughly 10 to around 30 percent between 1800 and 1870.

In 1849 absolute monarchy was peacefully replaced by a free constitution. The long-term benefits of fundamental principles such as the inviolability of private property rights, the freedom of contracting and the freedom of association were probably essential to future growth though hard to quantify.

Modernization and Convergence, 1870-1914

During this period Danish economic growth outperformed that of most other European countries. A convergence in real wages towards the richest countries, Britain and the U.S., as shown by O’Rourke and Williamsson (1999), can only in part be explained by open economy forces. Denmark became a net importer of foreign capital from the 1890s and foreign debt was well above 40 percent of GDP on the eve of WWI. Overseas emigration reduced the potential workforce but as mortality declined population growth stayed around one percent per annum. The increase in foreign trade was substantial, as in many other economies during the heyday of the gold standard. Thus the export share of Danish agriculture surged to a 60 percent.

The background for the latter development has featured prominently in many international comparative analyses. Part of the explanation for the success, as in other Protestant parts of Northern Europe, was a high rate of literacy that allowed a fast spread of new ideas and new technology.

The driving force of growth was that of a small open economy, which responded effectively to a change in international product prices, in this instance caused by the invasion of cheap grain to Western Europe from North America and Eastern Europe. Like Britain, the Netherlands and Belgium, Denmark did not impose a tariff on grain, in spite of the strong agrarian dominance in society and politics.

Proposals to impose tariffs on grain, and later on cattle and butter, were turned down by Danish farmers. The majority seems to have realized the advantages accruing from the free imports of cheap animal feed during the ongoing process of transition from vegetable to animal production, at a time when the prices of animal products did not decline as much as grain prices. The dominant middle-sized farm was inefficient for wheat but had its comparative advantage in intensive animal farming with the given technology. O’Rourke (1997) found that the grain invasion only lowered Danish rents by 4-5 percent, while real wages rose (according to expectation) but more than in any other agrarian economy and more than in industrialized Britain.

The move from grain exports to exports of animal products, mainly butter and bacon, was to a great extent facilitated by the spread of agricultural cooperatives. This organization allowed the middle-sized and small farms that dominated Danish agriculture to benefit from the economy of scale in processing and marketing. The newly invented steam-driven continuous cream separator skimmed more cream from a kilo of milk than conventional methods and had the further advantage of allowing transported milk brought together from a number of suppliers to be skimmed. From the 1880s the majority of these creameries in Denmark were established as cooperatives and about 20 years later, in 1903, the owners of 81 percent of all milk cows supplied to a cooperative (Henriksen 1999). The Danish dairy industry captured over a third of the rapidly expanding British butter-import market, establishing a reputation for consistent quality that was reflected in high prices. Furthermore, the cooperatives played an active role in persuading the dairy farmers to expand production from summer to year-round dairying. The costs of intensive feeding during the wintertime were more than made up for by a winter price premium (Henriksen and O’Rourke 2005). Year-round dairying resulted in a higher rate of utilization of agrarian capital – that is of farm animals and of the modern cooperative creameries. Not least did this intensive production mean a higher utilization of hitherto underemployed labor. From the late 1890’s, in particular, labor productivity in agriculture rose at an unanticipated speed at par with productivity increase in the urban trades.

Industrialization in Denmark took its modest beginning in the 1870s with a temporary acceleration in the late 1890s. It may be a prime example of an industrialization process governed by domestic demand for industrial goods. Industry’s export never exceeded 10 percent of value added before 1914, compared to agriculture’s export share of 60 percent. The export drive of agriculture towards the end of the nineteenth century was a major force in developing other sectors of the economy not least transport, trade and finance.

Weathering War and Depression, 1914-1950

Denmark, as a neutral nation, escaped the devastating effects of World War I and was even allowed to carry on exports to both sides in the conflict. The ensuing trade surplus resulted in a trebling of the money supply. As the monetary authorities failed to contain the inflationary effects of this development, the value of the Danish currency slumped to about 60 percent of its pre-war value in 1920. The effects of monetary policy failure were aggravated by a decision to return to the gold standard at the 1913 level. When monetary policy was finally tightened in 1924, it resulted in fierce speculation in an appreciation of the Krone. During 1925-26 the currency returned quickly to its pre-war parity. As this was not counterbalanced by an equal decline in prices, the result was a sharp real appreciation and a subsequent deterioration in Denmark’s competitive position (Klovland 1997).

Figure 2. Indices of the Krone Real Exchange Rate and Terms Of Trade (1980=100; Real rates based on Wholesale Price Index

Source: Abildgren (2005)

Note: Trade with Germany is included in the calculation of the real effective exchange rate for the whole period, including 1921-23.

When, in September 1931, Britain decided to leave the gold standard again, Denmark, together with Sweden and Norway, followed only a week later. This move was beneficial as the large real depreciation lead to a long-lasting improvement in Denmark’s competitiveness in the 1930s. It was, no doubt, the single most important policy decision during the depression years. Keynesian demand management, even if it had been fully understood, was barred by a small public sector, only about 13 percent of GDP. As it was, fiscal orthodoxy ruled and policy was slightly procyclical as taxes were raised to cover the deficit created by crisis and unemployment (Topp 1995).

Structural development during the 1920s, surprisingly for a rich nation at this stage, was in favor of agriculture. The total labor force in Danish agriculture grew by 5 percent from 1920 to 1930. The number of employees in agriculture was stagnating whereas the number of self-employed farmers increased by a larger number. The development in relative incomes cannot account for this trend but part of the explanation must be found in a flawed Danish land policy, which actively supported a further parceling out of land into small holdings and restricted the consolidation into larger more viable farms. It took until the early 1960s before this policy began to be unwound.

When the world depression hit Denmark with a minor time lag, agriculture still employed one-third of the total workforce while its contribution to total GDP was a bit less than one-fifth. Perhaps more importantly, agricultural goods still made up 80 percent of total exports.

Denmark’s terms of trade, as a consequence, declined by 24 percent from 1930 to 1932. In 1933 and 1934 bilateral trade agreements were forced upon Denmark by Britain and Germany. In 1932 Denmark had adopted exchange control, a harsh measure even for its time, to stem the net flow of foreign exchange out of the country. By rationing imports exchange control also offered some protection of domestic industry. At the end of the decade manufacture’s GDP had surpassed that of agriculture. In spite of the protectionist policy, unemployment soared to 13-15 percent of the workforce.

The policy mistakes during World War I and its immediate aftermath served as a lesson for policymakers during World War II. The German occupation force (April 9, 1940 until May 5, 1945) drew the funds for its sustenance and for exports to Germany on the Danish central bank whereby the money supply more than doubled. In response the Danish authorities in 1943 launched a policy of absorbing money through open market operations and, for the first time in history, through a surplus on the state budget.

Economic reconstruction after World War II was swift, as again Denmark had been spared the worst consequences of a major war. In 1946 GDP recovered its highest pre-war level. In spite of this, Denmark received relatively generous support through the Marshall Plan of 1948-52, when measured in dollars per capita.

From Riches to Crisis, 1950-1973: Liberalizations and International Integration Once Again

The growth performance during 1950-1957 was markedly lower than the Western European average. The main reason was the high share of agricultural goods in Danish exports, 63 percent in 1950. International trade in agricultural products to a large extent remained regulated. Large deteriorations in the terms of trade caused by the British devaluation 1949, when Denmark followed suit, the outbreak of the Korean War in 1950, and the Suez-crisis of 1956 made matters worse. The ensuing deficits on the balance of payment led the government to contractionary policy measures which restrained growth.

The liberalization of the flow of goods and capital in Western Europe within the framework of the OEEC (the Organization for European Economic Cooperation) during the 1950s probably dealt a blow to some of the Danish manufacturing firms, especially in the textile industry, that had been sheltered through exchange control and wartime. Nevertheless, the export share of industrial production doubled from 10 percent to 20 percent before 1957, at the same time as employment in industry surpassed agricultural employment.

On the question of European economic integration Denmark linked up with its largest trading partner, Britain. After the establishment of the European Common Market in 1958 and when the attempts to create a large European free trade area failed, Denmark entered the European Free Trade Association (EFTA) created under British leadership in 1960. When Britain was finally able to join the European Economic Community (EEC) in 1973, Denmark followed, after a referendum on the issue. Long before admission to the EEC, the advantages to Danish agriculture from the Common Agricultural Policy (CAP) had been emphasized. The higher prices within the EEC were capitalized into higher land prices at the same time that investments were increased based on the expected gains from membership. As a result the most indebted farmers who had borrowed at fixed interests rates were hit hard by two developments from the early 1980s. The EEC started to reduce the producers’ benefits of the CAP because of overproduction and, after 1982, the Danish economy adjusted to a lower level of inflation, and therefore, nominal interest rates. According to Andersen (2001) Danish farmers were left with the highest interest burden of all European Union (EU) farmers in the 1990’s.

Denmark’s relations with the EU, while enthusiastic at the beginning, have since been characterized by a certain amount of reserve. A national referendum in 1992 turned down the treaty on the European Union, the Maastricht Treaty. The Danes, then, opted out of four areas, common citizenship, a common currency, common foreign and defense politics and a common policy on police and legal matters. Once more, in 2000, adoption of the common currency, the Euro, was turned down by the Danish electorate. In the debate leading up to the referendum the possible economic advantages of the Euro in the form of lower transaction costs were considered to be modest, compared to the existent regime of fixed exchange rates vis-à-vis the Euro. All the major political parties, nevertheless, are pro-European, with only the extreme Right and the extreme Left being against. It seems that there is a discrepancy between the general public and the politicians on this particular issue.

As far as domestic economic policy is concerned, the heritage from the 1940s was a new commitment to high employment modified by a balance of payment constraint. The Danish policy differed from that of some other parts of Europe in that the remains of the planned economy from the war and reconstruction period in the form of rationing and price control were dismantled around 1950 and that no nationalizations took place.

Instead of direct regulation, economic policy relied on demand management with fiscal policy as its main instrument. Monetary policy remained a bone of contention between politicians and economists. Coordination of policies was the buzzword but within that framework monetary policy was allotted a passive role. The major political parties for a long time were wary of letting the market rate of interest clear the loan market. Instead, some quantitative measures were carried out with the purpose of dampening the demand for loans.

From Agricultural Society to Service Society: The Growth of the Welfare State

Structural problems in foreign trade extended into the high growth period of 1958-73, as Danish agricultural exports were met with constraints both from the then EEC-member countries and most EFTA countries, as well. During the same decade, the 1960s, as the importance of agriculture was declining the share of employment in the public sector grew rapidly until 1983. Building and construction also took a growing share of the workforce until 1970. These developments left manufacturing industry with a secondary position. Consequently, as pointed out by Pedersen (1995) the sheltered sectors in the economy crowded out the sectors that were exposed to international competition, that is mostly industry and agriculture, by putting a pressure on labor and other costs during the years of strong expansion.

Perhaps the most conspicuous feature of the Danish economy during the Golden Age was the steep increase in welfare-related costs from the mid 1960s and not least the corresponding increases in the number of public employees. Although the seeds of the modern Scandinavian welfare state were sown at a much earlier date, the 1960s was the time when public expenditure as a share of GDP exceeded that of most other countries.

As in other modern welfare states, important elements in the growth of the public sector during the 1960s were the expansion in public health care and education, both free for all citizens. The background for much of the increase in the number of public employees from the late 1960s was the rise in labor participation by married women from the late 1960s until about 1990, partly at least as a consequence. In response, the public day care facilities for young children and old people were expanded. Whereas in 1965 7 percent of 0-6 year olds were in a day nursery or kindergarten, this share rose to 77 per cent in 2000. This again spawned more employment opportunities for women in the public sector. Today the labor participation for women, around 75 percent of 16-66 year olds, is among the highest in the world.

Originally social welfare programs targeted low income earners who were encouraged to take out insurance against sickness (1892), unemployment (1907) and disability (1922). The public subsidized these schemes and initiated a program for the poor among old people (1891). The high unemployment period in the 1930s inspired some temporary relief and some administrative reform, but little fundamental change.

Welfare policy in the first four decades following World War II is commonly believed to have been strongly influenced by the Social Democrat party which held around 30 percent of the votes in general elections and was the party in power for long periods of time. One of the distinctive features of the Danish welfare state has been its focus on the needs of the individual person rather than on the family context. Another important characteristic is the universal nature of a number of benefits starting with a basic old age pension for all in 1956. The compensation rates in a number of schedules are high in international comparison, particularly for low income earners. Public transfers gained a larger share in total public outlays both because standards were raised – that is benefits became higher – and because the number of recipients increased dramatically following the high unemployment regime from the mid 1970s to the mid 1990s. To pay for the high transfers and the large public sector – around 30 percent of the work force – the tax load is also high in international perspective. The share public sector and social expenditure has risen to above 50 percent of GDP, only second to the share in Sweden.

Figure 3. Unemployment, Denmark (percent of total labor force)

Source: Statistics Denmark ‘50 års-oversigten’ and ADAM’s databank

The Danish labor market model has recently attracted favorable international attention (OECD 2005). It has been declared successful in fighting unemployment – especially compared to the policies of countries like Germany and France. The so-called Flexicurity model rests on three pillars. The first is low employment protection, the second is relatively high compensation rates for the unemployed and the third is the requirement for active participation by the unemployed. Low employment protection has a long tradition in Denmark and there is no change in this factor when comparing the twenty years of high unemployment – 8-12 per cent of the labor force – from the mid 1970s to the mid 1990s, to the past ten years when unemployment has declined to a mere 4.5 percent in 2006. The rules governing compensation to the unemployed were tightened from 1994, limiting the number of years the unemployed could receive benefits from 7 to 4. Most noticeably labor market policy in 1994 turned from ‘passive’ measures – besides unemployment benefits, an early retirement scheme and a temporary paid leave scheme – toward ‘active’ measures that were devoted to getting people back to work by providing training and jobs. It is commonly supposed that the strengthening of economic incentives helped to lower unemployment. However, as Andersen and Svarer (2006) point out, while unemployment has declined substantially a large and growing share of Danes of employable age receives transfers other than unemployment benefit – that is benefits related to sickness or social problems of various kinds, early retirement benefits, etc. This makes it hazardous to compare the Danish labor market model with that of many other countries.

Exchange Rates and Macroeconomic Policy

Denmark has traditionally adhered to a fixed exchange rate regime. The belief is that for a small and open economy, a floating exchange rate could lead to very volatile exchange rates which would harm foreign trade. After having abandoned the gold standard in 1931, the Danish currency (the Krone) was, for a while, pegged to the British pound, only to join the IMF system of fixed but adjustable exchange rates, the so-called Bretton Woods system after World War II. The close link with the British economy still manifested itself when the Danish currency was devaluated along with the pound in 1949 and, half way, in 1967. The devaluation also reflected that after 1960, Denmark’s international competitiveness had gradually been eroded by rising real wages, corresponding to a 30 percent real appreciation of the currency (Pedersen 1996).

When the Bretton Woods system broke down in the early 1970s, Denmark joined the European exchange rate cooperation, the “Snake” arrangement, set up in 1972, an arrangement that was to be continued in the form of the Exchange Rate Mechanism within the European Monetary System from 1979. The Deutschmark was effectively the nominal anchor in European currency cooperation until the launch of the Euro in 1999, a fact that put Danish competitiveness under severe pressure because of markedly higher inflation in Denmark compared to Germany. In the end the Danish government gave way before the pressure and undertook four discrete devaluations from 1979 to 1982. Since compensatory increases in wages were held back, the balance of trade improved perceptibly.

This improvement could, however, not make up for the soaring costs of old loans at a time when the international real rates of interests were high. The Danish devaluation strategy exacerbated this problem. The anticipation of further devaluations was mirrored in a steep increase in the long-term rate of interest. It peaked at 22 percent in nominal terms in 1982, with an interest spread to Germany of 10 percent. Combined with the effects of the second oil crisis on the Danish terms of trade, unemployment rose to 10 percent of the labor force. Given the relatively high compensation ratios for the unemployed, the public deficit increased rapidly and public debt grew to about 70 percent of GDP.

Figure 4. Current Account and Foreign Debt (Denmark)

Source: Statistics Denmark Statistical Yearbooks and ADAM’s Databank

In September 1982 the Social Democrat minority government resigned without a general election and was relieved by a Conservative-Liberal minority government. The new government launched a program to improve the competitiveness of the private sector and to rebalance public finances. An important element was a disinflationary economic policy based on fixed exchange rates pegging the Krone to the participants of the EMS and, from 1999, to the Euro. Furthermore, automatic wage indexation that had occurred, with short interruptions since 1920 (with a short lag and high coverage), was abolished. Fiscal policy was tightened, thus bringing an end to the real increases in public expenditure that had lasted since the 1960’s.

The stabilization policy was successful in bringing down inflation and long interest rates. Pedersen (1995) finds that this process, nevertheless, was slower than might have been expected. In view of former Danish exchange rate policy it took some time for the market to believe in the credible commitment to fixed exchange rates. From the late 1990s the interest spread to Germany/ Euroland has been negligible, however.

The initial success of the stabilization policy brought a boom to the Danish economy that, once again, caused overheating in the form of high wage increases (in 1987) and a deterioration of the current account. The solution to this was a number of reforms in 1986-87 aiming at encouraging private savings that had by then fallen to an historical low. Most notable was the reform that reduced tax deductibility of private interest on debts. These measures resulted in a hard landing to the economy caused by the collapse of the housing market.

The period of low growth was further prolonged by the international recession in 1992. In 1993 yet another shift of regime occurred in Danish economic policy. A new Social Democrat government decided to ‘kick start’ the economy by means of a moderate fiscal expansion whereas, in 1994, the same government tightened labor market policies substantially, as we have seen. Mainly as a consequence of these measures the Danish economy from 1994 entered a period of moderate growth with unemployment steadily falling to the level of the 1970s. A new feature that still puzzles Danish economists is that the decline in unemployment over these years has not yet resulted in any increase in wage inflation.

Denmark at the beginning of the twenty-first century in many ways fits the description of a Small Successful European Economy according to Mokyr (2006). Unlike in most of the other small economies, however, Danish exports are broad based and have no “niche” in the world market. Like some other small European countries, Ireland, Finland and Sweden, the short term economic fluctuations as described above have not followed the European business cycle very closely for the past thirty years (Andersen 2001). Domestic demand and domestic economic policy has, after all, played a crucial role even in a very small and very open economy.

References

Abildgren, Kim. “Real Effective Exchange Rates and Purchasing-Power-parity Convergence: Empirical Evidence for Denmark, 1875-2002.” Scandinavian Economic History Review 53, no. 3 (2005): 58-70.

Andersen, Torben M. et al. The Danish Economy: An international Perspective. Copenhagen: DJØF Publishing, 2001.

Andersen, Torben M. and Michael Svarer. “Flexicurity: den danska arbetsmarknadsmodellen.” Ekonomisk debatt 34, no. 1 (2006): 17-29.

Banggaard, Grethe. Befolkningsfremmende foranstaltninger og faldende børnedødelighed. Danmark, ca. 1750-1850. Odense: Syddansk Universitetsforlag, 2004

Hansen, Sv. Aage. Økonomisk vækst i Danmark: Volume I: 1720-1914 and Volume II: 1914-1983. København: Akademisk Forlag, 1984.

Henriksen, Ingrid. “Avoiding Lock-in: Cooperative Creameries in Denmark, 1882-1903.” European Review of Economic History 3, no. 1 (1999): 57-78

Henriksen, Ingrid. “Freehold Tenure in Late Eighteenth-Century Denmark.” Advances in Agricultural Economic History 2 (2003): 21-40.

Henriksen, Ingrid and Kevin H. O’Rourke. “Incentives, Technology and the Shift to Year-round Dairying in Late Nineteenth-century Denmark.” Economic History Review 58, no. 3 (2005):.520-54.

Johansen, Hans Chr. Danish Population History, 1600-1939. Odense: University Press of Southern Denmark, 2002.

Johansen, Hans Chr. Dansk historisk statistik, 1814-1980. København: Gyldendal, 1985.

Klovland, Jan T. “Monetary Policy and Business Cycles in the Interwar Years: The Scandinavian Experience.” European Review of Economic History 2, no. 3 (1998): 309-44.

Maddison, Angus. The World Economy: A Millennial Perspective. Paris: OECD, 2001

Mokyr, Joel. “Successful Small Open Economies and the Importance of Good Institutions.” In The Road to Prosperity. An Economic History of Finland, edited by Jari Ojala, Jari Eloranta and Jukka Jalava, 8-14. Helsinki: SKS, 2006.

Pedersen, Peder J. “Postwar Growth of the Danish Economy.” In Economic Growth in Europe since 1945, edited by Nicholas Crafts and Gianni Toniolo. Cambridge: Cambridge University Press, 1995.

OECD, Employment Outlook, 2005.

O’Rourke, Kevin H. “The European Grain Invasion, 1870-1913.” Journal of Economic History 57, no. 4 (1997): 775-99.

O’Rourke, Kevin H. and Jeffrey G. Williamson. Globalization and History: The Evolution of a Nineteenth-century Atlantic Economy. Cambridge, MA: MIT Press, 1999

Topp, Niels-Henrik. “Influence of the Public Sector on Activity in Denmark, 1929-39.” Scandinavian Economic History Review 43, no. 3 (1995): 339-56.


Footnotes

1 Denmark also includes the Faeroe Islands, with home rule since 1948, and Greenland, with home rule since 1979, both in the North Atlantic. These territories are left out of this account.

Citation: Henriksen, Ingrid. “An Economic History of Denmark”. EH.Net Encyclopedia, edited by Robert Whaples. October 6, 2006. URL http://eh.net/encyclopedia/an-economic-history-of-denmark/

Fertility and Mortality in the United States

Michael Haines, Colgate University

Every modern, economically developed nation has experienced the demographic transition from high to low levels of fertility and mortality. America is no exception. In the early nineteenth century, the typical American woman had between seven and eight live births in her lifetime and people probably lived fewer than forty years on average. But America was also distinctive. First, its fertility transition began in the late eighteenth or early nineteenth century at the latest. Other Western nations began their sustained fertility declines in the late nineteenth or early twentieth century, with the exception of France, whose decline also began early. Second, the fertility rate in America commenced its sustained decline long before that of mortality. This contrasts with the more typical demographic transition in which mortality decline precedes or occurs simultaneously with fertility decline. American mortality did not experience a sustained and irreversible decline until about the 1870s. Third, both these processes were influenced by America’s very high level of net in-migration and also by the significant population redistribution to frontier areas and later to cities, towns, and suburbs.

One particular difficulty for American historical demography is lack of data. During the colonial period, there was neither a regular enumeration nor vital registration. Some scholars, however, have conducted family reconstitutions and other demographic reconstructions using genealogies, parish registers, biographical data, and other local records, so we do know something about vital rates and population characteristics. In 1790, of course, the federal government commenced the decennial U.S. census, which has been the principal source for the study of population growth, structure, and redistribution, as well as fertility prior to the twentieth century. But vital registration was left to state and local governments. Massachusetts was the first state to institute continuous recording of births, deaths, and marriages, beginning in 1842 (some individual cities had registered vital events earlier), but the entire nation was not covered until 1933.

For the colonial period, we know more about population size than other matters, since the British colonial authorities did conduct some enumerations. The population of the British mainland colonies increased from several hundred non-Amerindian individuals in the early seventeenth century to about 2.5 million (2 million whites and about half a million blacks) in 1780. Birthrates were high, ranging between over forty and over fifty live births per one thousand people per annum. The high fertility of American women attracted comment from late eighteenth-century observers, including Benjamin Franklin and Thomas Malthus. Mortality rates were probably moderate, with crude death rates ranging from about twenty per one thousand people per annum to over forty. We know a good deal about mortality rates in New England, somewhat less about the Middle Colonies, and least about the South. But apparently mortality was lower from Pennsylvania and New Jersey northward, and higher in the South. Life expectancy at birth ranged from the late twenties to almost forty.

Information on America’s demographic transition becomes more plentiful for the nineteenth and twentieth centuries. The accompanying table provides summary measures of fertility and mortality for the period 1800-2000. It includes, for fertility, the crude birthrate, the child-woman ratio (based solely on census data), and the total fertility rate; and, for mortality, life expectancy at birth and the infant mortality rate. The results are given for the white and black populations separately because of their very different social, economic, and demographic experiences.

Table 1 indicates the sustained decline in white birthrates from at least 1800 and of black fertility from at least 1850. Family sizes were large early in the nineteenth century, being approximately seven children per woman at the beginning of the century and between seven and eight for the largely rural slave population at mid-century. The table also reveals that mortality did not begin to decline until about the 1870s or so. Prior to that, death rates fluctuated, being affected by periodic epidemics and changes in the disease environment. There is some evidence of rising death rates during the 1830s and 1840s. The table also shows that American blacks had both higher fertility and higher mortality relative to the white population, although both groups experienced fertility and mortality transitions. For example, both participated in the rise in birthrates after World War II known as the baby boom, as well as the subsequent resumption of birthrate declines in the 1960s.

Conventional explanations for the fertility transition have involved the rising cost of children because of urbanization, the growth of incomes and nonagricultural employment, the increased value of education, rising female employment, child labor laws and compulsory education, and declining infant and child mortality. Changing attitudes toward large families and contraception, as well as better contraceptive techniques, have also been cited. Recent literature suggests that women were largely responsible for much of the birthrate decline in the nineteenth century — part of a movement for greater control over their lives. The structural explanations fit the American experience since the late nineteenth century, but they are less appropriate for the fertility decline in rural areas prior to about 1870. The increased scarcity and higher cost of good agricultural land has been proposed as a prime factor, although this is controversial. The standard explanations do not adequately explain the post-World War II baby boom and subsequent baby bust. More complex theories, including the interaction of the size of generations with their income prospects, preferences for children versus material goods, and expectations about family size, have been proposed.

The mortality decline since the late nineteenth century seems to have been the result particularly of improvements in public health and sanitation, especially better water supplies and sewage disposal. The improving diet, clothing, and shelter of the American population over the period since about 1870 also played a role. Specific medical interventions beyond more general environmental public health measures were not statistically important until well into the twentieth century. It is difficult to disentangle the separate effects of these factors. But it is clear that much of the decline was due to rapid reductions in specific infectious and parasitic diseases, including tuberculosis, pneumonia, bronchitis, and gastro-intestinal infections, as well as such well-known lethal diseases as cholera, smallpox, diphtheria, and typhoid fever. Nineteenth-century cities were especially unhealthy places, particularly the largest ones. This began to change by about the 1890s, when the largest cities instituted new public works sanitation projects (such as piped water, sewer systems, filtration and chlorination of water) and public health administration. They then experienced rapid improvements in death rates. As for the present, rural-urban mortality differentials have converged and largely disappeared. This, unfortunately, is not true of the differentials between whites and blacks.

Table 1
Fertility and Mortality in the United States, 1800-1999

Approx. Date Birthratea Child-Woman Ratio b Total Fertility Rate c Life Expectancy d Infant Mortality Rate e
White Blackf White Black White Blackf White Blackf White Blackf
1800 55.0 1342 7.04
1810 54.3 1358 6.92
1820 52.8 1295 1191 6.73
1830 51.4 1145 1220 6.55
1840 48.3 1085 1154 6.14
1850 43.3 58.6g 892 1087 5.42 7.90g 39.5 23.0 216.8 340.0
1860 41.4 55.0h 905 1072 5.21 7.58h 43.6 181.3
1870 38.3 55.4i 814 997 4.55 7.69i 45.2 175.5
1880 35.2 51.9j 780 1090 4.24 7.26j 40.5 214.8
1890 31.5 48.1 685 930 3.87 6.56 46.8 150.7
1900 30.1 44.4 666 845 3.56 5.61 51.8k 41.8k 110.8k 170.3
1910 29.2 38.5 631 736 3.42 4.61 54.6l 46.8l 96.5l 142.6
1920 26.9 35.0 604 608 3.17 3.64 57.4 47.0 82.1 131.7
1930 20.6 27.5 506 554 2.45 2.98 60.9 48.5 60.1 99.9
1940 18.6 26.7 419 513 2.22 2.87 64.9 53.9 43.2 73.8
1950 23.0 33.3 580 663 2.98 3.93 69.0 60.7 26.8 44.5
1960 22.7 32.1 717 895 3.53 4.52 70.7 63.9 22.9 43.2
1970 17.4 25.1 507 689 2.39 3.07 71.6 64.1 17.8 30.9
1980 15.1 21.3 300 367 1.77 2.18 74.5 68.5 10.9 22.2
1990 15.8 22.4 298 359 2.00 2.48 76.1 69.1 7.6 18.0
2000 13.9 17.0 343 401 2.05 2.13 77.4 71.7 5.7 14.1

a Births per 1000 population per annum.
b Children aged 0-4 per 1000 women aged 20-44. Taken from U.S. Bureau of the Census, (1975), Series 67-68 for 1800-1970. For the black population 1820-1840, W.S. Thompson and P.K. Whelpton, Population Trends in the United States (New York: McGraw-Hill, 1933), Table 74, adjusted upward 47% for relative under-numeration of black children aged 0-4 for the censuses of 1820-1840.
c Total number of births per woman if she experienced the current period age-specific fertility rates throughout her life.
d Expectation of life at birth for both sexes combined.
e Infant deaths per 1000 live births per annum.
f Black and other population for birth rate (1920-1970), total fertility rate (1940-1990), life expectancy at birth (1950-1960) and infant mortality rate (1920-1970).
g Average for 1850-59.
h Average for 1860-69.
i Average for 1870-79.
j Average for 1880-84.
k Approximately 1895.
l Approximately 1904.

Sources: U.S. Bureau of the Census, Historical Statistics of the United States (Washington, DC: G.P.O, 1975). U.S. Bureau of the Census, Statistical Abstract of the United States, 1986 (Washington, DC: G.P.O, 1985). Statistical Abstract of the United States, 2001 (Washington, DC: G.P.O, 2001). National Center for Health Statistics, National Vital Statistics Reports, various issues. Census 2000 Summary File 1: National File (May, 2003). Ansley J. Coale and Melvin Zelnik, New Estimates of Fertility and Population in the United States (Princeton, NJ: Princeton University Press 1963). Ansley J. Coale and Norfleet W. Rives, “A Statistical Reconstruction of the Black Population of the United States, 1880-1970: Estimates of True Numbers by Age and Sex, Birth Rates, and Total Fertility,” Population Index 39, no. 1 (Jan., 1973): 3-36. Michael R. Haines, “Estimated Life Tables for the United States, 1850-1900,” Historical Methods, 31, no. 4 (Fall 1998): 149-169. Samuel H. Preston and Michael R. Haines, Fatal Years: Child Mortality in Late Nineteenth Century America (Princeton, NJ: Princeton University Press, 1991), Table 2.5. Richard H. Steckel, “A Dreadful Childhood: The Excess Mortality of American Slaves,” Social Science History (Winter 1986): 427-465.

References

Haines, Michael R. and Richard H. Steckel (editors). A Population History of North America. New York: Cambridge University Press, 2001.

Klein, Herbert. A Population History of the United States. New York: Cambridge University Press, 2004.

Vinovskis, Maris (editor). Studies in American Historical Demography. New York: Academic Press, 1979.

Citation: Haines, Michael. “Fertility and Mortality in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 19, 2008. URL http://eh.net/encyclopedia/fertility-and-mortality-in-the-united-states/