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Wages through the ages - What history says about inequality and technology

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

ONE factor behind the rise of income inequality in America over the past four

decades is that the labour market has increasingly favoured the well-educated.

Real wages for college graduates have risen by over a third since 1963, whereas

wages for those without high-school diplomas have dropped. As more of the

economy becomes automated, doomsayers worry that the gap between the haves and

the have-nots will only grow. History shows, however, that this need not be so.

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

phenomenon. Compiling records from churches, monasteries, colleges, guilds and

governments, Gregory Clark, an economist at the University of California,

Davis, has put together a comprehensive dataset of English wages that stretches

back to the 13th century. Mr Clark notes that in the past the skilled-wage

premium, defined as the difference in wages between craftsmen, such as

carpenters and masons, and unskilled labourers has been fairly stable, save for

two sharp declines (see chart).

The first drop came in the 14th century, and had nothing to do with

technological change. Life expectancy in medieval England was short and

interest rates were high, meaning that taking on the seven-year apprenticeship

needed to become a craftsman came with a heavy opportunity cost. But interest

rates started falling in this period, from around 10% in 1290 to 7.5% in 1340.

When the Black Death struck England in 1348, wiping out a third of the

population, interest rates fell further, to 5%, and apprenticeships became much

more attractive. The increased supply of skilled labour relative to unskilled

workers drove down the wage premium. Data from Jan Luiten van Zanden of Utrecht

University show similar patterns in Belgium, France and the Netherlands.

The second big decline in the skilled-wage premium came after the Industrial

Revolution. Inventions like the power loom displaced artisans, and increased

the relative demand for unskilled labour. Craftsmen whose skills took years to

hone suddenly found themselves being replaced by machines operated by workers

with just a few months training. (The Luddites reacted by smashing the

machines.) One study has found that the share of unskilled workers rose from

20% of the labour force in England in 1700 to 39% in 1850. The ratio of

craftsmen s wages to labourers started to fall in the early 1800s, and did not

recover until 1960.

Using a different inequality measure leads to slightly different results. Peter

Lindert, also at the University of California, Davis, says that as

middle-skilled jobs in England disappeared, the Gini coefficient of household

earnings rose, peaking in 1800. The share of earnings captured by the top 1%

reached a high in around 1870. But the two measures then went on to fall, not

bottoming out until the mid-20th century.

What distinguishes the advances of the computer age from those of the

Industrial Revolution is that they have favoured skilled workers. So far,

university degrees have been a reliable proxy for skill but this may change as

artificial intelligence starts taking jobs away from white-collar workers.

Projections from America s Bureau of Labour Statistics show that four of the

five fastest-growing occupations in the country involve personal care; none of

those jobs requires a bachelor s degree.

In any case, to assume that current economic trends will persist is to assume

an inefficient labour market. Ken Rogoff, an economist at Harvard, argues that

as the wage premium for a particular group of workers rises, firms will have a

greater incentive to replace them.