Going back at least to Marx, surplus labor particularly in the countryside has been considered the enemy of labor-saving technological progress. With boundless countryside labor, either because of force (serfdom, slavery, etc.) or other limited opportunities for migration, landowners can lack the incentive to adopt new labor-substituting technologies that they might otherwise adopt. This story anecdotally applies to the American South. From 1940 to 1970, a second “Great Migration” of African-Americans fled the South toward industrial cities in the North with high labor demand. Simultaneously, the South began adopting farming technology that had been much more common in the North and Midwest. These African-American workers were often part of a paternalistic relation with their employers which imposed relatively large moving costs on potential migrants before 1940. But is there any cause and effect here? Was the industrial boom in the heartland the cause of modernization in the South?
Naidu and Hornbeck (two of the best young economic historians in the world; more on this shortly) examine this by looking at the 1927 flood of the Mississippi river. During this flood, large number of black workers in the Delta were forced to move to Red Cross camps, where networks formed that led many of the workers to head to cities like Chicago; blatant abuse of the Red Cross system by white planters certainly served as an additional incentive. In the Delta, mule use as well as tractors for transportation of cotton to the gin was very limited.
Imagine that the cost of black labor increases, as happened during the flood due to the ease of labor moving North from the aid camps. In a simple model where black labor, white labor and capital are substitutes, the one-time increase in black wages increases capital use, decreases land value (due to the loss of exploitable black labor paid less than MP due to moving cost), and increases white labor (which was assumed to be part of a national labor market already). The authors examine this model using a difference-in-difference applied to counties which were flooded and other non-flooded counties in the Delta.
Flooded counties lost 14% of their black population after the flood. Flooded counties adopt mules and horses at a higher rate than non-flooded counties by 1930, and quickly replace these farm animals with tractors. The use of tractors causes average farm size to rise in flooded counties over the next 30 years; large average farm size, worldwide, is highly correlated with productive farming. Profits of one large landowner with accessible records sees no change in profits despite the modernization of inputs. There are many robustness checks, but overall this is a convincing case that the South modernized when labor costs were relieved from their artificially low pre-flood level.
August 2012 NBER Working Paper (IDEAS page)
(P.S.: If this type of work interests you, take a quick peek at some of the other work the coauthors have been doing. Hornbeck’s recent AER shows in great detail the slow economic adjustment to the Dust Bowl’s short-run effects, with great relevance to current climate change policy, and his 2010 QJE with Greenstone and Moretti which uses large industrial plant “contests” to study local knowledge spillovers is the state of the art on the question. Naidu has a forthcoming AER on how pseudo-slavery relations (roughly, labor contracts enforced in criminal courts in 19th century Britain) were used to smooth labor market risk, as well as a great 2011 paper showing clear-as-day evidence that someone aware of secret coup plotting in the US during the Cold War was using that knowledge to profit in the stock market. Naidu also does some cool evolutionary game theory work with the always-great Sam Bowles.)
A Fine Theorem 