Labor Scarcity

Labor Scarcity

The 30-year trend of rising income inequality in the United States has led to heightened interest among labor economists in assessing the role of labor-market institutions in the determination of wages and other market outcomes. The central role of institutions governing work and compensation is a venerable theme in economics. Adam Smith famously held that the incentives associated with labor systems could explain the relative success of countries like England and the backwardness of economies based on slavery or metayage. Karl Marx based his stages theory of economic development on the nature of the relationship between workers and property holders under different economic regimes. Recently, economists and economic historians have revisited the long-run impact of institutions on economic growth and performance in an effort to understand the divergent fortunes of different countries and regions.1

The economic history of the United States presents a kind of laboratory for research on labor-market institutions and their impact. The contrast between the labor systems of chattel slavery in the cotton South and free wage labor in the industrializing North plays a leading role in our understanding of patterns of regional development in the antebellum period. After the Civil War, regional differences persisted, but much of the action shifted to the evolution of industrial and postindustrial labor markets, from the relatively unfettered competitive environment of the late nineteenth century to the emergence of a federally regulated and more centralized bargaining system by the 1950s. The partial unraveling of that system in recent decades is one of the prime suspects in the trend toward greater inequality.

No economist has spent more time in this laboratory, or produced more significant results, than Gavin Wright. In this chapter, our goal is to sketch a broad interpretation of the evolution of American labor markets, building on a key concept that informs Wright's work on both southern economic history and the growth of the U.S. industrial economy since the late nineteenth century—namely, what we will refer to as labor-market institutional regimes. We begin by providing a conceptual framework, defining what we mean by institutions and making a case for why labor-market institutions may be expected to exhibit both coherence and persistence—the defining traits of an institutional regime. We then begin our historical narrative with the familiar contrast between the labor systems of the antebellum northern and southern economies, and proceed through the dramatic changes in labor-market regimes wrought by the Civil War and later by the World Wars and the Great Depression.

These regime shifts shaped not only important labor-market outcomes, such as wages, working conditions, and employment, but also the dynamics of technology and human capital accumulation. An important conclusion, which we draw from Wright's work and from the events recounted in our narrative, is that trends in the underlying economic “fundamentals” that are often given causal primacy are themselves partly the endogenous product of institutional regimes.

Labor-market regimes

The institutions of the labor market can be defined as the principal rules and organizations governing the transactions between the buyers and sellers of ...