3.History: High wage economy

Were pre-industrial societies universally poor?

• Average living standards were low by modern standards but varied
substantially across countries.
• Classical economists already recognised these differences:
• Smith: wages highest in the commercial centres of the North Atlantic
• Malthus: demographic behaviour explains international wage
differences: high wages in England with fertility restrictions and low wages in Asia with high fertility
• Contemporary traveller accounts supported these views:
• Workers in France, Italy, China or India lived at basic subsistence
• English workers enjoyed much higher living standards

Benchmarks for pre-industrial living standards: bank

Subsistence basket:
- Simple diet required to sustain an adult male at 1,900 kcal per day
– Differs across countries to select the cheapest locally available grain and source of protein.
– Minimal consumption of the cheapest cloth (cotton or linen) and heating fuel when necessary.
Respectability basket:
• More calories (2,500) and higher-quality protein
• Bread, meat and dairy rather than the cheapest staples
• Represents a comfortable working-class standard, not mere
survival

Diet

• Engels described high standards for English workers
– The best-off workers ate meat, bacon, and cheese every day
– High consumption of bread instead of oats and barley
• The rest of Europe
– Dutch working class consumed high volumes of bread, meat and butter
– 18th century French diet consisted 95% of cereals; very little animal
protein (fish along the seacoast)
– Italian standards declined throughout the early modern period: bread
and meat gave way to polenta as the staple food.
• Asia
– Chinese diet consisted of rice and some fish if available.
– Travellers found Indians the poorest: cheapest available grains; meat consumption was taboo. Minimal clothing, simple housing.

How can we measure historical living standards?

GDP per capita
– Broad measure of average economic performance
– Estimates prior to 1870 are scarce and inaccurate (for most countries)
– Point estimates, no continuous series (but rapid improvement)
Real wages
– Simpler measure, easier to construct
– Direct measures based on historical wage and price observations
– Measure the purchasing power of labour income
– More comparable
✓ Usually collected for simple trades in every country
✓ Nominal wages are deflated using the same approach
For international comparisons before 1800, real wages are especially useful!

How to reconstruct real wages?

Step 1: Nominal wage
• Collect daily wages from historical records (Hospitals, Universities, Monasteries)
• Convert currencies into a common unit (often grams of silver, bc most currencies were based on it)
Step 2: Cost of living
• Define a representative consumption basket
• Collect local prices for each item
• Calculate the cost of purchasing the basket
Step 3: Real wage
• Welfare ratio = annual earnings / annual cost of the basket

Welfare ratio

• Welfare ratio = annual earnings / annual cost of the basket
• Ratio = 1: just enough to support the reference household
• Ratio > 1: income above subsistence
• The surplus can finance better food, consumer goods and other expenditure

The little divergence in real wages

Late Middle Ages

After the Black Death, real wages were high across much of Europe.

A fully employed worker could often afford approximately 1.5 respectability baskets.

After 1500

Population recovery caused real wages to fall across much of Europe.

In:

• Florence.

• Vienna.

• Other continental European cities.

Real wages gradually moved toward subsistence.

England and the Netherlands

London and Amsterdam diverged from the rest:

• Workers continued to afford the respectability basket.

• Subsistence ratios were commonly around three or four.

• Workers had significant surplus purchasing power.

Asia

By the eighteenth century:

• Workers in Delhi and Beijing could not afford a European respectability basket.

• Their earnings were often only around 30–40% of its cost.

• Their incomes were closer to the cost of the bare-bones subsistence basket.

Central conclusion

The Great Divergence in industrial development was preceded by a Little Divergence in wages and living standards within Europe.

Skilled workers in Europe

Carpenters and masons typically earned more than unskilled labourers.

In Europe, the skill premium was around 60%.

The same geographical pattern remained:

• Skilled workers in London and the Low Countries retained high purchasing power.

• Skilled wages declined relative to prices in much of continental Europe.

• In some cities, skilled workers could barely afford the respectability basket by the late eighteenth century.

This matters for industrialization because skilled workers were:

• Potential inventors.

• Machine builders.

• Mechanics.

• Craftsmen capable of implementing new technology.

New England: a high-wage economy without early industrialization

• Atlantic trade
– Abundant land created a very high land–labour ratio (labour scarcity)
– High wages attracted migrants from Britain
– Colonies specialised in primary exports for European markets
• But economic structure remained agriculture-heavy
– Colonial America remained predominantly rural
– Manufacturing was limited before independence
– Urbanisation and industry expanded after 1776
➢ By 1800, New England had the highest real wages in the world
– But high wages did not automatically lead to industrialisation!

Massachusetts overtook London as the world‘s highest-wage economy
• Britain remained well above continental Europe
• North Atlantic economy combined high wages with expanding markets, creating favourable conditions for economic growth
• High wages alone cannot explain why industrialisation began in Britain rather than America

Nominal wages across England

-London was England‘s highest-
wage labour market
-Wage differences between English
cities persisted for centuries
-Yet the Industrial Revolution began
in the Midlands and North — not London

This shows that wages were only one part of the explanation.

High wages translated into better living standards

Consumption
– Higher wages allowed British workers to consume more food
– They also consumed more expensive food:
– Skilled workers ate more meat and dairy products
– Tea and sugar became common among skilled workers and the middle classes
– Alcohol consumption was high and rose during the 18th century
• Biological standard of living
– Adult height reflects childhood nutrition and disease environment
– 18th-century English recruits were 8-10 cm taller than recruits from France, Italy and Austria
➢ Wage evidence consistent with independent indicators of living standards
Investments into education

Stronger workforce

England‘s broad purchasing power created a large
domestic market for manufactured goods

Main message

1. Research findings
i. Productivity and living standards began to increase in the West
long before the Industrial Revolution.
ii. English and Dutch households earned large consumer surpluses,
which they spent on commercial goods and education.
2. Tools of the historian: historical national accounts, real wage estimates