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Development of the American economy.

Development of the American Economy

The NBER's Program on the Development of the American Economy (DAE), established ten years ago, has continued the work of the Bureau in exploring the pace and pattern of economic growth in America. The DAE program's subjects--including income inequality, industrial productivity, the gender gap in earnings, long-run demographic change, savings and the capital stock--range widely in scope and time period but are united by a common methodology.

We focus on issues of current economic policy significance that require knowledge of long-term economic factors. For example, DAE researchers have demonstrated that we cannot understand current differences between male and female workers without knowledge of the past; similarly, we cannot comprehend the reasons for black and white income differentials today without historical study. In the past, such research efforts often had been stymied by the absence of suitable data. The DAE program already has assembled more than 50 historical datasets capable of revealing the relationship between the current and past behaviors of households and firms.

The DAE program covers seven major areas: labor and population; capital and savings; technology and productivity change; an industrial organization approach to governments and firms; industrial organization and business history; macroeconomic history; and political economy.(1) The results of DAE projects are now being disseminated in the NBER-DAE Historical Factors in Long-Run Growth Working Papers Series, and the NBER Working Paper Series. The DAE has also just initiated a series of monographs, Long-Term Factors in Economic Development, under the editorial direction of Clayne L. Pope and Robert W. Fogel. Thus far, 10 monographs written by 14 NBER-DAE research associates are scheduled for this series. Two have gone to press, one is being edited, and seven others are in varying stages of production.(2)

Because of the breadth of the DAE program, I have selected three projects to highlight here: gender differences in earnings and occupations; racial disparities in schooling and economic success; and the inequality of income and wealth on the American frontier. Each has been the primary research project of a DAE member for the past five years, and each is scheduled for inclusion in the monograph series.

Understanding the Gender Gap: An Economic History of American Women

In my recent book, I examine the evolution of the female work force, from the late eighteenth century to the present, and the historical roots of present gender inequalities. Like other DAE projects, this study draws on a variety of data sources, including Census manuscripts, city and business directories, original schedules of (U.S. Department of Labor) Women's Bureau bulletins, and U.S. Commissioner of Labor reports.

The labor force participation rate of married women in 1900 was about one-tenth what it is today; fewer than two workers out of ten were female in 1900, while almost half are female today. Yet in terms of earnings and occupations, women have fared less well. Occupations have been segregated by sex throughout our history, and this segregation diminished only slightly from 1900 to 1970. In both years, about two-thirds of all women or men would have had to change occupations to bring about parity by sex. The ratio of female-to-male earnings remained stable from the 1950s to the early 1980s, hovering around 60 cents on the dollar, although the ratio has increased substantially since 1981. Further, economic analysis indicates that less than half of the difference between the earnings of men and women can be explained by their observable characteristics, other than gender, such as years of work experience and education.

The disparity between changes in the employment of women and the gender gap in earnings is disturbing to many. But rising participation need not lead to increased labor market experience, and generally it is years on the job that augments earnings for the individual. The connection between changes in participation and in work experience depends on whether women work intermittently or whether they are continuous participants over their life cycles. I find that adult working women remained employed for extensive periods. For example, in 1940 more than 60 percent of a group of 45-year-old married working women had been employed for 75 percent of the years since they began work. The great majority of employed women were continuous participants and as employment rates rose they were joined in the labor force by women whose previous work experience was distant and brief. For all currently employed women, therefore, years of work did not increase greatly during periods of rising participation.(3)

But the finding that married women were persistent workers also implies that earnings and occupational differences, in large measure, may reflect discrimination. Indeed, "wage discrimination," the portion of the gender gap in earnings that cannot be explained by measurable factors, was less than 20 percent among industrial workers around 1900, but had reached its current value of 55 percent by the mid-twentieth century, when a plurality of employed women were office and sales workers.(4)

Before 1940, more than 80 percent of all married women left the labor force at marriage, and the majority never returned to work. But among married women who did remain at work, a substantial fraction worked for much of their lifetime. Employers may have been unable to discern who among the young, single women would remain employed and who would not. The vast majority of women were channeled into rather dead-end jobs involving little job training and skill acquisition. I uncovered several hundred firm-level records revealing that more than 70 percent of firms hiring office workers excluded women, by company policy, both from entry-level jobs and from jobs farther up the occupational ladder.

Restricted access to these ladders, despite long tenure for many women, produced a measure of "wage discrimination" in 1940 that was approximately equal to estimates for the 1970s. Ironically, the ratio of female-to-male full-time earnings narrowed by 20 percent sometime around the 1920s. Men and women were nearly equal in years of education, and the burgeoning clerical sector offered financial returns to education that vastly exceeded those in manufacturing. Thus "wage discrimination" actually increased at the same time that the gender gap in earnings narrowed.(5)

"Marriage bars," the written policies of many firms and school districts not to hire married women and to fire single women when they married, were further impediments to women's economic progress that emerged from the late nineteenth century to the 1930s. These bars had their origins in certain personnel policies of firms and local school districts that made the retention of married women workers costly. The marriage bar was associated with tenure-based salary scales, written or implied contractual obligations of employers, and other modern personnel practices. At their height in the early 1940s, marriage bars affected more than 80 percent of all school districts and probably more than 50 percent of all female office workers.(6)

Because married women were only 20 percent of all women workers in the 1920s, marriage bars did not greatly restrict labor supply. But demographic and economic changes after the 1930s caused the bars to entail greater sacrifices by firms. In 1960, the available supply of young single women not attending school was almost one-fourth its 1900 level, while the proportion of educated and trained older married women was greater than ever. Only with the "labor squeeze" were marriage bars abolished by the majority of firms and school districts.

The history of gender in the workplace contains a number of lessons about the functioning of labor markets. Large changes in labor supply or demand often are needed to alter the structure of jobs and firm policies. No one firm wants to innovate in the hiring of married women, the integration of a particular occupation, or the granting to women of the right to return after ample maternity leave, unless the costs of not doing so are overwhelming. Firms eventually did innovate in all three areas. The market eventually may adjust, but the process is tempered and hampered by various norms, expectations, laws, institutions, and other factors that maintain the past within the present.

Race and Schooling in the American South, 1880-1950

Robert A. Margo's research concerns racial difference in earnings and education. Like mine, it begins with a set of historical facts concerning long-term trends. In 1990, annual earnings of the typical adult black man were just 45 percent of those of the typical white man. Forty years later, on the eve of World War II, the ratio was barely higher (48 percent). Yet in 1980, another 40 years later, the ratio had increased to 69 percent. Two frameworks have been advanced to account for the initial stability and subsequent rise in the earnings ratio: a dual labor market, or institutionalist, perspective, and a human capital model.

Institutionalists claim that black men, before World War II, were trapped in low-wage jobs in southern agriculture. Their absorption into better-paying jobs outside the farm economy was slow because of labor market discrimination in the South and the availability of a competing supply of labor--European immigrants--in the North. When immigration suddenly was curtailed during World War I, northern employers began hiring southern blacks, and their increased demand started the flow of blacks North. A further exodus occurred during the 1940s. But wartime economies alone were insufficient to equilibrate earnings. Additional shocks --the civil rights movement and antidiscrimination legislation--were, according to the institutionalist perspective, fundamental to black economic success after World War II.

Proponents of the human capital model argue that the initial stability of the earnings ratio can be explained by large and persistent racial differences in schooling. On the eve of World War II, the average black male worker completed 3.5 fewer years of school than the average white. Had the racial schooling gap been smaller before World War II, more blacks would have entered nonfarm jobs. After World War II, racial differences in schooling did narrow, and the racial earnings gap narrowed.

Margo's primary objective has been to quantify the relative historical merits of the institutionalist and human capital frameworks. Utilizing the rich and newly available public use samples of the 1900, 1910, 1940, and 1950 population Censuses, Margo finds that schooling enhanced the probability that a black man would leave southern agriculture for a job in industry, in the South or the North. Literate southern black men, for example, were four times more likely than their illiterate counterparts to leave the South.

But Census data also reveal that over half of the black migration North before 1940 cannot be explained by secular improvements in schooling and that important flows of black labor out of southern agriculture were associated with World War II.(7) Further, it appears that blacks were underrepresented in the expansion of nonfarm employment in the South, even when controlling for education. Indexes of occupational and industrial segregation in the South were about 35 percent higher in 1950 than in 1990, and the trend was not reversed until the civil rights movement of the 1960s. Margo concludes that the human capital and institutional models are each about half correct in explaining long-term trends in black incomes and occupations.

Having established that education increased the ability of black men to enter the nonfarm economy, Margo next explores the source of racial differences in schooling prior to World War II. One reason for the disparity is found in the discriminatory behavior of school boards. In Plessy v. Ferguson (U.S., 1896), the Supreme Court ruled that laws requiring racially separate public facilities were constitutional, provided that the facilities were equal. But because blacks were largely disenfranchised in the South, the equal part of the doctrine was generally disregarded. The violations of Plessy, Margo argues, hindered the educational attainment of black children and thus their ability to leave the farm economy.(8)

But even if the equal part of the doctrine had been enforced, a large part of the racial schooling gap would have remained. Margo estimates that the average southern black child (5 to 16 years old) attended only 16 months of school around 1900, about half that of the average southern white child. Had separate-but-equal been enforced, the racial gap would have been reduced by 46 percent.(9) The poverty of black parents, itself caused in large measure by their lack of education, kept black children out of the classroom as much as the poor quality of black schools did. The racial schooling gap would have been larger still were it not for the extraordinary sacrifices black parents made to see their children educated. These were sacrifices, Margo concludes, that eventually paved the way for a narrowing in the schooling gap later in the century and the rise in the racial earnings ratio after World War II.

Wealth and Income Inequality at the Frontier: Utah, 1850-1900

The settlement of the American West, which involved the migration of millions of households, has been viewed as the most significant and unique force shaping American society, politics, and character. Three DAE researchers are studying the frontier settlement process with an emphasis on how income and wealth distributions evolved.(10) James R. Kearl, Clayne L. Pope, and Larry T. Wimmer collaboratively have assembled data from census manuscripts, family genealogies, church financial records, and tax rolls to form a statistical moving picture of Utah from its initial settlement in 1847 to the turn of this century. These data sources, unequalled for any other time or place, have enabled the researchers to create a longitudinal panel of 17,500 household heads with information on gross wealth, income, and occupation. They also have compiled residential histories, demographic data, and linkages of household heads to brothers and fathers within the panel. Utah, while not an entirely representative community, shared many essential features of other frontier areas in America.

Utah began its settlement, Kearl, Pope, and Wimmer report, with an egalitarian wealth distribution, at least in comparison with that of the United States. The Gini ratio, a convenient summary statistic ranging from no inequality (0) to total inequality (1), for real estate wealth in Utah was .69 in 1850, while it was .86 for the entire United States. The richest 10 percent of the population in Utah owned 52 percent of the wealth, while the richest 10 percent of the U.S. population owned 73 percent.(11) But the initially egalitarian distribution of wealth on the frontier did not last long. During the next 20 years, the distributions of income and wealth in Utah moved toward those of the rest of the nation. By 1870, the share of wealth held by the top 10 percent in Utah was 61 percent while the share of wealth held by the top 10 percent in the United States was 70 percent.

Increasing inequality was driven largely by forces related to the settlement process. The longer an individual remained in Utah, the greater was income and wealth, and this "rent to duration" was substantial. Each year of duration added more than 3 percent to the wealth and about 2 percent to the income of an 1870 household (controlling for age, occupation, birthplace, and county of residence). During the 1960s, the peak decade of settlement, the population of Utah more than tripled, and the majority of new householders were immigrants. Inequality was heightened both because the large population influx increased the variance in duration and because the foreign born were initially disadvantaged in comparison with those who migrated from other states.(12)

Kearl, Pope, and Wimmer find that family background was an important source of variance in both income and wealth. Unobserved family background, measured by the similarity in the economic circumstance of brothers (controlling for age, occupation, and other variables), accounted for 18 percent of the variance in income and 29 percent of the variance in wealth. But the economic similarity of brothers was not related primarily to the wealth of their parents. Parental occupation and wealth accounted for only 20 percent of the family background effect on wealth and 30 percent of the effect on income. Most of a family's influence on the economic outcomes of children came through indirect means rather than through direct transfers of wealth.(13)

Despite forces generating greater inequality with economic development, frontier Utah was a place of economic opportunity. Less than 23 percent of unskilled laborers remained so from one census to the next, compared with 68 percent for Boston. Most of the unskilled became farmers (49 percent to 65 percent, depending on the year), and significant numbers became artisans. Mobility in an economy can be measured, for example, by the number of deciles (tenths of the distribution) or quintiles (fifths of the distribution) that an individual moves within the wealth or income distribution. Wealth accumulation accompanied occupational change in Utah, and typical households in the poorest third of the 1860 wealth distribution moved upward by four deciles when observed next in 1870. Substantial mobility was present at all levels within the distributions of income and wealth. Of the households observed in both 1860 and 1870, 65 percent moved from one quintile to the next, up or down, and 29 percent moved two quintiles.

Rising income and wealth inequality in this settlement community does not support the view that the frontier was the egalitarian refuge of historical accounts. But any disillusionment with this finding should be moderated by the extensive economic mobility found by Kearl, Pope, and Wimmer in the Utah data. If Utah were representative of other frontier areas, then the closing of the frontier in 1890 did eliminate one source of economic opportunity that had been provided to millions of households during the previous century.

(1)C. Goldin and C. L. Pope, "Report of the Development of the American Economy (DAE) Program of the National Bureau of Economic Research. Part I: Past Accomplishments and Continuing Projects," and "Part II: New Initiatives," both forthcoming as NBER Working Papers. (2)The three books scheduled for publication within this year are: R. Floud, A. Gregory, and K. Wachter, Height, Health, and History: Nutritional Status in the United Kingdom, 1750-1980 (New York: Cambridge University Press, 1990); C. Goldin, Understanding the Gender Gap: An Economic History of American Women (Oxford, U.K.: Oxford University Press, 1990); and S. Preston and M. R. Haines, Fatal Years: Child Mortality in Late Nineteenth-Century America (Princeton: Princeton University Press, 1990). The remaining seven manuscripts are: L. E. Davis, R. E. Gallman, and T. Hutchins, Whales and Men--Productivity and Profits: A Study of Technology, Institutions, and Market Changes in the American Whaling Industry, 1816-1906; B. J. Eichengreen, International Finance in Disarray; R. W. Fogel, The Escape from Hunger and Early Death: Europe and America, 1750-2050; J. R. Kearl and C. L. Pope, Wealth and Income Inequality at the Frontier: Utah, 1850-1900; R. A. Margo, Race and Schooling in the American South, 1880-1950: A Quantitative History; K. L. Sokoloff, In Pursuit of Private Comfort: Early American Industrialization, 1790-1860; and R. H. Steckel, Families on the Move: A History of Migration within the United States, 1700-1900. (3)C. Goldin, "Life-Cycle Labor Force Participation of Married Women: Historical Evidence and Implications," NBER Working Paper No. 1251, December 1983; also in Journal of Labor Economics 7 (January 1989), pp. 20-47. (4)C. Goldin, "The Earnings Gap between Male and Female Workers: A Historical Perspective," NBER Working Paper No. 1888, April 1986. (5)C. Goldin and S. Polachek, "Residual Differences by Sex: Perspectives on the Gender Gap in Earnings," American Economic Review 77 (May 1987), pp. 143-151. (6)C. Goldin, "Marriage Bars: Discrimination against Married Women Workers, 1920s to 1950s," NBER Working Paper No. 2747, October 1988. (7)R. A. Margo, "Schooling and the Great Migration," NBER Working Paper No. 2697, September 1988. (8)R. A. Margo, "Educational Achievement in Segregated School Systems: The Effects of Separate-But-Equal," NBER Working Paper No. 1620, May 1985; also in American Economic Review 76 (September 1984), pp. 794-801. (9)R. A. Margo, "Accounting for Racial Differences in School Attendance in the American South, 1900: The Role of Separate-But-Equal," NBER Working Paper No. 2242, May 1987; also in Review of Economics and Statistics 69 (November 1987), pp. 661-666. (10)A summary of many of the results of the project may be found in C. L. Pope, "Households on the Frontier: Income and Wealth in Utah, 1850-1900, in Markets in History: Economic Studies of the Past, D. W. Galenson, ed. New York: Cambridge University Press, 1989. (11)J. R. Kearl, C. L. Pope, and L. T. Wimmer, "The Distribution of Wealth in a Settlement Economy: Utah, 1850-1870," NBER Reprint No. 314, August 1982; also in Journal of Economic History 40 (September 1980), pp. 477-496. (12)J. R. Kearl and C. L. Pope, "Choices, Rents, and Luck: Economic Mobility of Nineteenth-Century Utah Households," in Long-Term Factors in American Economic Growth, NBER Studies in Income and Wealth No. 51, S. L. Engerman and R. E. Gallman, eds. Chicago: University of Chicago Press, 1986. (13)J. R. Kearl and C. L. Pope, "Unobservable Family and Individual Contributions to the Distributions of Income and Wealth," NBER Working Paper No. 1425, August 1984; also in Journal of Labor Economics 4 (July 1986), pp. 548-579.

Claudia Goldin is codirector, with Robert W. Fogel, of the Development of the American Economy Program at the NBER.
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Author:Goldin, Claudia
Publication:NBER Reporter
Date:Dec 22, 1989
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