This is a wonderful piece of theory-driven economic history. Everyone knows that machinery in the Industrial Revolution was “de-skilling”, replacing craft workers with rote machine work. Bessen suggests, using data from mid-19th century mills in New England, that this may not be the case; capital is expensive and sloppy work can cause it to be out of service, so you may want to train your workers even more heavily as you deepen capital. It turns out that it is true that literate Yankee girls were largely replaced by illiterate, generally Irish workers (my ancestors included!) at Lowell and Waltham, while simultaneously the amount of time spend training (off of piece-wages) increased as did the number of looms run by each worker. How can we account for this?
Two traditional stories – that history is driven by the great inventor, or that the mill-owners were driven by philanthropy – are quickly demolished. The shift to more looms per worker was not the result of some new technology. Indeed, adoption of the more rigorous process spread slowly to Britain and southern New England. As for philanthropy, an economic model of human capital acquisition shows that the firms appear to have shifted toward unskilled workers for profit-based reasons.
Here’s the basic idea. If I hire literate workers like the Yankee farm girls, I can better select high-quality workers, but these workers will generally return home to marry after a short tenure. If I hire illiterate workers, their initial productivity is lower but, having their family in the mill town, they are less likely to leave the town. Mill owners had a number of local methods to collude and earn rents, hence they have some margin to pay for training. Which type should I prefer? If there exist many trained illiterate workers in town already, I just hire them. If not, the higher the ratio of wage to cloth price, the more I am willing to invest in training; training takes time during which no cloth is made, but increases future productivity at any given wage.
Looking at the Massachusetts mill data, a structural regression suggests that almost all of the increase in labor productivity between 1834 and 1855 was the result of increasing effective worker experience, a measure of industry-specific human capital (and note that a result of this kind is impossible without some sort of structural model). Why didn’t firms move to illiterate workers with more training earlier? Initially, there was no workforce that was both skilled and stable. With cloth prices relatively high compared to wages, it was initially (as can be seen in Bessen’s pro forma calculation) much more profitable to use a labor system that tries to select high quality workers even though they leave quickly. Depressed demand in the late 1830s led cloth prices to fall, which narrowed the relative profitability of well-trained but stable illiterate workers as compared to the skilled but unstable farm girls. A few firms began hiring illiterate workers and training them (presumably selecting high quality illiterate workers based on modern-day unobservables). This slowly increased the supply of trained illiterate workers, making it more profitable to switch a given factory floor over to three or four looms per worker, rather than two. By the 1850s, there was a sufficiently large base of trained illiterate workers to make them more profitable than the farm girls. Some light counterfactual calculations suggest that pure profit incentive is enough to drive the entire shift.
What is interesting is that the shift to what was ex-post a far more productive system appears to hinge critically on social factors – changes in the nature of the local labor supply, changes in demand for downstream products, etc. – rather than on technological change embodied in new inventions or managerial techniques. An important lesson to keep in mind, as nothing in the above story had any Whiggish bias toward increasing productivity!
Final working paper (IDEAS version). Final paper published in the Journal of Economic History, 2003. I’m a big fan of Bessen’s work, so I’m sure I’ve mentioned before on this site the most fascinating part of his CV: he has no graduate degree of any kind, yet has a faculty position at a great law school and an incredible publication record in economics, notably his 2009 paper on socially inefficient patents with Eric Maskin. Pretty amazing!