Economics 2333, Topic #3: Manufacturing

1. Economics 2333, Topic #3: Manufacturing Professor Robert A. Margo Spring 2014

2. Topics • US ascendancy in manufacturing: role of natural resources (Wright 1990) • Historical micro-data, 1850-1880 • Origins of capital-skill complementarity (Goldin-Katz; Atack, et. al.) and related. • Economies of Scale: Atack v. Sokoloff.

3. Wright (1990) • Initially, land-labor ratio is high in the US relative to Europe. Standard trade theory suggests that country should specialize in goods that exploit its relative factor endowment. • So: US should export agricultural goods and import manufacturing goods • True ca. 1850: 87% of US exports were agriculture, while about half of imports were manufacturing • HOWEVER, by late 19th century US is becoming the leading manufacturing producer and exporter, overtaking UK • Chart #1: Shares of World Industrial Output • Chart #2: Per Capita Industrial Output • Labor Productivity in US Manufacturing MUCH higher than UK or Germany by late 19th century

7. Why Did This Happen? • Clue is in next slide: US exports were very capital intensive compared with US imports • Look for “complementarity” between capital and other inputs • One frequently cited possibility: capital-skill complementarity • Why: (a) more capital per worker raises productivity (b) US has relatively low skill premium (relatively abundant skilled labor) • Characteristic of modern manufacturing, began to emerge in early C20 (BUT after US ascendancy) • Problem: exports relative to imports were NOT especially skill intensive

11. What Else? • Another possibility: capital/natural resources complementarity • US has abundant natural resources AND (important) institutional environment that allowed for efficient extraction and allocation to highest productive use • 19th century manufacturing did not especially economize on use of natural resources • International markets in natural resources had not yet developed • SO: US mfg benefited • Evidence: Exports/Imports were very natural resources intensive • Regression Analysis: Industries that had high per unit use of natural resources AND high capital labor ratios tended to export more

16. What Became of the US Advantage? • Eventually, it disappeared with the development of world markets in natural resources • US begins to import particular natural resources, most prominent example being petroleum

20. US Manufacturing Samples • Census of manufactures begins in 1810, very poor quality. First legitimate census is 1820. Also 1832 McLane report. • Sokoloff samples: used to study productivity growth, fixed vs. working capital, relative use of female and child labor (Goldin and Sokoloff) • Need for a new 1820 sample, also 1832. • 1850-1880: Atack-Bateman samples. Repeated cross sections. National are self-weighting (1880 has problems). State samples are larger. • See Atack’s Vanderbilt website.

26. Capital-Skill • A central feature of modern economies is that capital and skilled labor are relative complements. Fall in the price of capital goods → increase in the relative demand for skilled labor. • Has this always been true? Possibly not. “De-skilling” Hypothesis: IR → new machines → decrease in demand for skilled artisans → division of labor and the factory system. • Some today but more on this later in semester: Katz and Margo (2013). Too simple for manufacturing, not true for entire economy.

27. Goldin-Katz (1) • In C20 there is considerable evidence that larger, more capital intensive firms use relatively more skilled labor. Consistent with finding that wages are positively correlated with establishment size. • This change according to GK, dates from the late C19. Key technical change is electrification + invention of “continuous processing” technology

28. Goldin-Katz (2) • Simple framework for evaluating the effect of tech change (or falling relative price of K) on demand for skill • Manufacturing takes place in two steps. Step #1, convert raw capital into usable capital. This requires skilled labor. Step #2, combine usable capital with unskilled labor. • Artisan technology uses a lot of usable capital relative to unskilled labor in step #2 but not necessarily a lot of capital per unit of output. • Factory technology uses relatively more unskilled labor per unit of usable capital → K/L MAY rise (not certain but highly likely), skilled share of labor force falls. Assembly line and CP technology bigger scale but uses much less unskilled labor per unit of usable capital in second stage and more capital per unit of output. Skilled share of labor force rises in move from A to CP. • Moral: should find positive correlation between capital intensity and percent unskilled in C19 manufacturing but reverse in C20.

32. Regressions • Table 3: worker education level is positively correlated with K/L and use of electricity. • Table 4: average wage is positively correlated with education level, K/L, and electricity use. Note positive coefficient on establishment size. • Table 6: non-production wage share positively related to capital intensity, wage coefficient indicates elasticity of substitution between production and non-production workers less than one. Capital coefficient higher than in recent decades.

37. De-Skilling in C19 US Manufacturing? • Goldin and Sokoloff (1982). Examine variation across establishments in percent women and children. Idea is that women and children were less skilled than adult men. Strong positive correlation between percent female/child and establishment size in 1820-1850. • Atack, Bateman, and Margo (2004). Examine variation in “establishment wage” (average wage at the establishment level). If de-skilling is present, establishment wage should be a negative function of establishment size (Note: opposite is true in C20). ABM find this to be the case in 1850 and 1880. Also show that the distribution of establishment wages becomes more unequal because mass in left tail increases – more workers at establishments with low average wages. • Katz and Margo (2013). Update GS using 1850-1880. Show that relative use of female/child labor is positively correlated with capital intensity but this is entirely explained by establishment size. Construct a proxy for overall percent unskilled in 1880 from average establishment wage and daily wages of unskilled and skilled labor. Use IPUMS industry classifications to show that manufacturing occupation distribution “hollowed out” in C19. Interpret in a “task-based” framework.

42. Capital “Deepening” • Key feature of 19th century manufacturing was “capital deepening” → more capital per worker • Capital deepening positively correlated with establishment size • More K/L → higher labor productivity

45. Steam Power, Part One • Key new technology of the 19th century was steam power • Advantages of steam: “footloose”, more reliable BUT variable costs high (coal) • Diffusion of steam varied geographically → most rapid if water power sites were unavailable

46. Steam Power, Part Two • Another key feature of the diffusion of steam → much more likely to be used by large establishments, where large refers to the number of workers • Why? Late 19th century evidence that use of inanimate power augmented the division of labor: some steps could be powered, others not • Large scale establishments shifted strongly away from steam after 1850 and employment shifted towards steam powered factories • Use of steam raised labor productivity. Some of this is due to greater K/L BUT even if one controls for capital intensity, productivity goes up in larger establishments, consistent with a TFP effect

50. Economies of Scale • US manufacturing sector “ascends” in C19 and early C20 (Wright 1990). Scale economies seem central to this, because average firm size increases substantially. Chandler (1977) is a classic book on the “rise of big business”. Legal/financial factors facilitate use of the corporate form and rise of a market for “managerial labor”. Corporate governance issues become important (ownership vs. control). Key names working on this: Hilt, Lamoreaxu. • Not a lot of doubt about scale economies at turn of C20. Chandler has many examples. See also Atack, Rhode, and Margo (in progress). • What about early in the century? Many economic historians are convinced by Sokoloff (EEH 1984). Uses 1820-1850 samples to estimate standard productions. Finds evidence of scale economies for non-mechanized establishments very early (1820). Strongly suggests that division of labor was a contributor to labor productivity growth and US manufacturing ascendancy.