Effect of mechanization on wages and employment

The Effects of Mechanization on Wages and Employment: Evidence from the Expansion of Steam Power

Recent advances in technology have sparked a heated debate about the impact of mechanization on present-day society. A recurring concern expressed by many commentators is that machines will take over jobs previously performed by workers, leading to mass unemployment and growing inequality. This mounting fear is not new; Technology has always created cultural concerns throughout history (Mokyr et al. 2015). The path to change, however, may not be disruptive for all workers and industries. For example, prominent economists such as Adam Smith have long emphasized the positive effects of technology and argued that mechanization would lead to significant productivity gains in the long run, leading to cheaper goods, increased demand for labor, and thus more employment. In equilibrium, the net effect of mechanization on workers and wages is thus obscured by how displacement and productivity effects weigh against each other (Acemoglu and Restrepo 2018, Autor and Salomons 2018, Atack et al. 2019, Frey 2019, Hötte et al. 2022). .

Understanding the impact of mechanization has difficult measurement issues because waves of contemporary mechanization typically overlap, making it difficult to isolate the impact of a particular technology. This study attempts to address these concerns by turning to a time when technological development was still in its earlier stages and government support for workers was weak. In turn, this makes it easier to identify the effects of mechanization on labor outcomes, since institutional and other confounding factors may have played a smaller role in past societies.

We consider one of the most significant waves of mechanization in history: the rise and spread of steam power in 19th-century France. This empirical setting provides an ideal testing ground to explore our key hypotheses. French historical statistics are remarkably detailed for the period in question and allow us to trace the process of mechanization from its earliest stages of expansion to its maturity. A peculiar feature in this context is that traditional sources of motive power such as water and wind played an important role in French manufacturing. This means that large variations in local patterns of technological adoption are better understood than in England, for example, where the coal-steam model predominated.

To set up our analysis, we create a new dataset consisting of two parts. The first concerns data reported in two early industrial surveys carried out by the French Bureau of Statistics in the 19th century (Chanut et al. 2000). The two surveys are comprehensive and include data on wages, employment and objective energy use. The second group of data – collected from various sources – concerns district-level information on various geographic, demographic and economic factors including access to water power, proximity to coalfields, quality of the workforce and presence of banks. , all of which help us identify the local initial conditions that initially influenced steam-engine adoption.

We use this information to answer two main questions. First, what was the main driver of the adoption of the steam engine? Here, we examine five hypotheses that have loomed large in the literature: (1) the so-called high-wage hypothesis that argues that expensive labor and cheap energy (coal) induce producers to innovate (Allen 2009, 2011); (2) the resource-availability hypothesis that instead emphasizes the availability of cheaper coal alternatives such as wind and water as a potential brake on innovation (Crouzet 1996); (3) the health-and-knowledge hypothesis that emphasizes the quality of the labor force in terms of nutrition, health status, and knowledge as a push-factor that facilitates innovation (Mokyr 1990, Squicciarini and Voigtländer 2015, Kelly et al 2014, 2022); (4) the market-power hypothesis that views market size and proximity to technological knowledge as important drivers of innovation (Acemoglu and Linn 2004, Franck and Galor 2021); and, finally, (5) the finance-led growth hypothesis that emphasizes the role of financial institutions in fostering innovation (Madsen and Ang 2016, Russo and Silla 2005). Second, we explore the effects of steam engine adoption on labor market outcomes.

To provide answers, we apply a differ-in-dif method with propensity score matching, comparing industries that remained without steam power (non-treated group) with those that adopted steam power between the two registers (treated group). The process of migration was characterized by considerable heterogeneity both in place and in terms. Figure 1 shows the distribution of treated and non-treated areas in France in the 1840s for the most common sub-industry – flour milling. Treated districts are marked in dark blue and non-treated districts in light blue White districts were those where flour milling was absent in the 1840s or steam had already been installed.

Figure 1 Medical and non-medical local flour-milling districts

In terms of factors responsible for vaping, our findings lend support to central mechanisms highlighted in the literature. Proximity to coalfields as well as numerous and highly paid laborers significantly increased the possibility of steam intake. Lack of water power or inadequate water supply encouraged companies to install steam engines. Scientific as well as technical knowledge significantly increases the likelihood of steam adoption, while basic literacy skills and university knowledge do not expand the diffusion of steam power. Larger market size, a better transportation infrastructure, presence of banks, and better local health conditions also increased the likelihood of steam engine adoption.

Regarding the impact of steam-engine adoption on labor market outcomes, our findings contradict fears that past mechanization was accompanied by significant wage reductions and job losses. After adjusting for selection effects, we observe that steam-adopting industries employ 94% more workers than their non-steam-adopting counterparts (Figure 2). We also find that industries adopting steam paid wages that were on average up to 5% higher than industries that did not (Figure 3). The positive effect of mechanization on wages suggests that technological change widened the wage structure even in earlier stages of industrial development and not just recently (Goldin and Katz 1996, 1998). Furthermore, steam power was a labor-increasing idea (Rousseau 2008) confronting the Habakkuk thesis that labor shortages led to higher wages and ultimately drove labor-saving industrial innovations (Habakkuk 1962, Allen 2009).

Figure 2 Effect of steam engine adoption on male employment

Figure 3 Effect of Steam Engine Adoption on Male Wages

Given the particular importance of water as an energy source in French manufacturing, we also explore a sub-sample of water-powered industries in the 1840s, considering the impact that partial or complete conversion to steam had on labor outcomes. We refer to the first paradigm (partial transformation) as technological complementarity and the second (full transformation) as technological substitution or creative destruction. To identify the impact on wages and employment, we compare steam-intensive industries that relied exclusively on water power between the 1840s and 1860s. Here, our results suggest that technological substitution significantly increased both the number of male workers employed (by 41%) and their average wages (by 14%) while technological substitution significantly increased the number of male workers (by 91%) but not their average wages. In this sense creative destruction was good for workers’ compensation, but technological complementarity was good for employment.

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