Labor Markets

Labor Markets. The term “labor market” does not refer to a particular location or set of institutions. Instead it describes the processes of labor allocation in an economy, that is, the methods by which employers fill vacancies and workers find jobs, as well as the internal allocation of labor within businesses, households, and other economic organizations. The interaction of supply and demand in the market determines wages and employment.

The historical study of labor markets has two major objectives. The first is to describe how labor is allocated over time and how markets have evolved. The second is to document the consequences for wages, employment, the distribution of income and jobs, and the overall efficiency of the market. Although American labor markets have rarely if ever achieved perfect efficiency, the American economy's sustained growth and American workers' high standard of living could not have been achieved without the development of effective labor‐market institutions.

The Colonial Period.

From the beginning of European settlement in North America, American labor markets have been characterized by the scarcity of labor in relationship to land and natural resources. Natural abundance raised the productivity of labor, enabling ordinary Americans to enjoy a higher standard of living than comparable Europeans. Realizing these economic opportunities required labor‐market mechanisms capable of overcoming the obstacles of high passage costs and imperfect communication.

In the colonial period, labor moved in three ways: free migration, indentured servitude, and the forced migration of African slaves. Because of the high cost of transatlantic passage, only a small fraction of potential migrants could afford transport to the Americas. The cost barrier was especially problematic for the young, landless laborers who stood to gain the most from such migration.

Under the indenture system, migrants signed contracts with merchants in England committing themselves to work for a specified period of years in exchange for passage to the New World. Once in America, the merchants sold these contracts to planters needing labor. Because land abundance made it hard for planters to hire free labor, the use of unfree workers—either indentured servants or slaves—was the only way they could expand cultivation beyond the limits set by their family's labor. Demand for servants varied geographically, depending on crops and climates. Consistent with the existence of a well‐functioning market, terms of service appear to have varied with individual productivity and employment conditions in the specific locality.

In the mainland British colonies, African slaves began to replace indentured servants as the principal source of unfree labor in the late seventeenth century. From 1700 to 1770, the proportion of blacks in the Chesapeake region grew from 13 percent to around 40 percent. In South Carolina and Georgia, the black proportion of the population climbed from 18 percent to about 45 percent in the same time period. The transition from indentured European to enslaved African labor reflected the effects of shifting supply‐and‐demand conditions. Improved economic conditions in Europe after 1650 reduced the supply of servants and raised their cost. Meanwhile, increasing competition in the slave trade caused slave prices to fall.

Because export opportunities were more limited in northern colonies, they imported few slaves. Yet abundant land created opportunities for small‐scale agriculture in Pennsylvania, New York, and New Jersey that enabled employers to attract indentured servants throughout the eighteenth century. In New England, where farming was less profitable and little demand existed for hired labor, immigrants, either free or slave, were infrequent.

By 1776, market forces had created a sharp regional division in labor‐market regimes. Across the South, large‐scale plantation agriculture utilizing slave labor was well established. In the North, family farms predominated. Hired labor might be used on occasion, but limited markets did not justify expansion. What had emerged by accident was soon codified into law. After the Revolution, all the northern states adopted some form of gradual emancipation, and in 1787 the Northwest Ordinance prohibited the introduction of slavery into territories north of the Ohio River.

From Independence to World War I.

Three related developments dominated the history of labor markets between the Revolutionary War and World War I: westward expansion, the growth of manufacturing, and mass immigration. From 1800 to 1910, the labor force grew from 2.3 million to 37.5 million. In these same years, the agricultural labor force's share of total employment dropped from 74 percent to 31 percent. Manufacturing, which had employed 3 percent of the labor force in 1800, employed 22 percent of all workers in 1910.

American independence eliminated British restrictions on expansion and initiated a century‐long process of western settlement. Fertile land and abundant natural resources drew population toward less densely settled regions in the West. This movement was accelerated by improvements in transportation, which lowered shipping costs while increasing the speed, comfort, and reliability of travel.

Northern and southern responses to frontier expansion differed, with profound effects on settlement patterns and regional development. The large size of southern slave plantations made it relatively easy for planters to recover the fixed costs of obtaining information and relocating production onto new lands. Plantations were also largely self‐sufficient, requiring little urban or commercial infrastructure to make them economically viable. Well‐established slave markets facilitated migration by enabling western planters to acquire additional labor in the East. In the North, the small scale of family farms made it more difficult to recover the costs of migration. Consequently, the task of mobilizing labor fell on promoters who bought up large tracts of land at low prices and then subdivided them. Promoters offered generous loans, invested heavily in recruiting settlers, and actively encouraged the development of such urban services as blacksmith shops, grain merchants, wagon builders, and general stores. Population density, urbanization, and industrialization thus were all much higher in the North than in the South in 1860.

As improved transportation lowered the cost of midwestern agricultural products, the value of agricultural land and labor declined in New England. The result was a pool of underemployed agricultural labor—especially young women—who were available to work in the manufacturing establishments that developed in the Northeast during the War of 1812 and after the imposition of protective tariffs in 1816.

Throughout the nineteenth century, migration costs remained a significant though declining obstacle to transatlantic labor movements. Immigration accelerated in the late 1840s following the Irish potato famine of 1845–1847 and the failed German revolution of 1848. While northeastern industries drew arrivals who had few resources (mostly Irish), agriculture and commerce in the Middle West attracted wealthier immigrants (mostly German). Few immigrants, however, settled in the South.

More than 25 million immigrants arrived in the United States between 1870 and 1915. By 1900, about 20 percent of the population was foreign born, but because working‐age males immigrated in disproportionate numbers, they constituted about 25 percent of the labor force. Immigrants were even more concentrated in manufacturing, where they often comprised a majority of the labor force. In 1907–1908, for example, foreign‐born workers represented 72 percent of the factory labor force in textiles, 58 percent in iron and steel, 61 percent in slaughtering and meatpacking, and 34 percent in boots and shoes.

The close correlation between immigration levels and the American business cycle, on the one hand, and the narrowing of transatlantic wage differentials, on the other, indicates a growing integration of American and European labor markets. The mechanisms linking European villages to American factories relied on informal networks of friends and family as well as the recruitment efforts of steamship agents, employment agencies, and employers. The increased supply of labor that resulted appears to have depressed wages among less‐skilled workers who competed directly with the new arrivals. Workers with more skills, however, may actually have benefited from the influx of unskilled labor. Rising immigration and its adverse effects on less‐skilled workers produced increasing anti‐immigrant sentiments. But efforts to limit immigration proved unsuccessful, except on the West Coast, where the Chinese Exclusion Act (1882) effectively constrained labor supplies.

Mass immigration and the post–Civil War expansion of manufacturing brought substantial changes in the nature of employment relationships. In the Antebellum Era, most people worked on family farms or in small artisanal workshops. After the Civil War, however, urbanization, improved transportation and communication, and the introduction of high‐volume, capital‐intensive production processes created enormous factories. Workers became more isolated from managers and more dependent on wage labor.

One symptom of these changes was growing public concern about industrial unemployment and other labor issues. The late nineteenth century also saw a considerable increase in labor conflict. Early labor organizations had functioned primarily as benevolent associations—providing mutual insurance for illness, death, or unemployment. But after the Civil War effective labor unions began to emerge for the first time.

During the 1880s, the Knights of Labor enjoyed a brief surge of popularity, but membership collapsed after a series of failures in 1886. In the 1890s, the American Federation of Labor (AFL) consolidated the union movement, with membership reaching 2 million (5.9 percent of the labor force) by 1910.

The First World War to the Late Twentieth Century.

Declining rates of natural increase and immigration restrictions imposed in the 1920s slowed the growth of population and labor force in the twentieth century. Nonetheless, by 1995 the labor force had increased to 132 million. Agricultural employment continued to decline, now falling in both absolute and relative terms. By 1990, just 3.4 million workers (2.6 percent of the labor force) were employed in agriculture. Meanwhile, manufacturing's share of the labor force had dropped to only 17 percent. The service‐producing and government sectors grew most rapidly, employing close to two‐thirds of all workers by 1990. Accompanying these sectoral shifts were pronounced changes in labor‐force composition, as more women entered the workplace and children and older men exited. By the 1990s, nearly 45 percent of the labor force was female, up from about 18 percent in 1900. Westward expansion had ceased, but shifting regional fortunes continued to produce substantial population redistribution. Finally, the twentieth century was characterized by the growth of long‐term employment relationships and increasing government regulation of labor markets.

World War I ended mass immigration, and following the war Congress imposed a stringent quota system. Immigration rates remained low until 1965, when Congress liberalized immigration policies. Arrivals increased from 3.3 million in the 1960s to 4.5 million in the 1970s, and continued to grow into the 1990s, raising concern about the labor‐market impacts of uncontrolled immigration.

The interruption of immigration caused by World War I initiated new patterns of internal population movements. Although the South's defeat in the Civil War ended slavery, postbellum southern labor markets had remained largely isolated from the rest of the country. The shock of the war, emancipation, and the slow growth of demand for the region's principal crop—cotton—caused southern wages to fall well below northern levels by the 1880s. Yet migration to the North was limited. Northern employers could meet their labor needs with immigrant labor, and potential southern migrants lacked contacts to help them find work in northern cities. Only during World War I did northern employers begin actively to recruit southern workers. Northward migration, once begun, continued into the 1970s, interrupted only by the Great Depression.

The effects of this population redistribution on regional wages became apparent in the 1960s with a significant narrowing of interregional differences in wages and earnings. By 1980, per capita incomes in much of the South had reached approximately 90 percent of the national average, up from about 60 percent in 1940.

In the 1970s and 1980s, the industrial heartland of the Northeast and Midwest experienced a series of shocks caused by rising energy prices and increasing international competition. Declining manufacturing employment coupled with the shift of service‐sector jobs to the South and West initiated a new pattern of population movements in the 1980s.

World War I also contributed to changes in employment relationships. Prompted partly by the high costs of labor turnover, employers had adopted policies to encourage longer‐term employment relationships. Tight wartime labor markets accelerated this process and led companies to establish centralized personnel departments that shifted responsibility for hiring, promotion, wage setting, and discipline away from shop foremen. These developments heralded the emergence of modern “internal” labor markets.

The twentieth century also brought expanded government intervention in labor markets. Protective legislation limiting hours and regulating working conditions was initially restricted mainly to women and children. The turning point came in the 1930s with New Deal legislation, which regulated industrial relations and other aspects of the labor market. In 1938, the Fair Labor Standards Act for the first time established national minimum wage and maximum hours standards.

New Deal laws contributed to a rapid expansion of union membership. Between 1934 and 1938, membership nearly doubled, reaching close to 30 percent of nonagricultural workers. It continued to climb in the 1940s, reaching an all‐time high of close to 40 percent of nonagricultural workers in 1953. Unionization rates declined consistently thereafter, however, despite a rise in public‐sector unions after the 1960s.

The introduction of federal unemployment insurance and passage of the Employment Act of 1946, which committed the government to pursue macroeconomic policies intended to insure full employment, represent other important instances of government intervention in the labor market. While scholars disagree over the effect of macroeconomic policies on employment, workers at the end of the twentieth century were much less likely than workers in 1900 to become unemployed, although those who did were likely to spend considerably more time between jobs.

The pattern of women's participation in the labor force has changed markedly. In 1900, less than 6 percent of married women worked outside the home; by 1990, more than 50 percent held paying jobs. This dramatic shift is attributable to changes in both supply—falling fertility rates, increased education, and the women's movement—and demand—the rise of white‐collar and clerical jobs, evolving social attitudes, and technological changes reducing the physical demands of most kinds of work. With rising female participation came an increase in relative wages. Median female earnings were about 70 percent of median male earnings in the late 1990s, up from around 55 percent in 1900. Women continued to be disproportionately concentrated in some occupations and substantially underrepresented in others, however.

As women entered the labor force, other groups of workers left. Rising education and legal prohibitions substantially reduced child labor. Participation among elderly workers declined with a shift toward earlier retirement. More years of education and earlier retirement contributed to a reduction in total work over the average worker's lifetime, as did the decline in the length of the average workweek from sixty hours at the turn of the century to around forty hours by 1940.

The economic progress of African Americans was painfully slow from emancipation until the mid–twentieth century, but between 1940 and 1980 black male wages rose from 43 percent of white male wages to just over 84 percent. While considerable evidence indicated that increases in the quality and quantity of education and training were important in improving economic conditions among blacks, equally compelling evidence suggested that federal antidiscrimination programs adopted in the 1960s were instrumental in promoting progress as well.

Labor Markets and U.S. History.

Labor markets have played a prominent role in shaping the development of the United States. The early settlement of the colonies, slavery, westward migration, industrialization, immigration, the changing status of blacks and women, the rise of high school and college education, and the growth of retirement are among the many phenomena that cannot be understood without examining the influence of labor markets. Despite the impressive efficiency with which changing labor‐market institutions have mobilized human resources in response to economic incentives, imperfections in market allocation have been at least as important in shaping the country's history.
See also Agriculture; Automation and Computerization; Congress of Industrial Organizations; Cotton Industry; Expansionism; Factory System; Immigrant Labor; Immigration Law; Labor Movements; New Deal Era, The; Scientific Management; Technology; Tobacco Industry; Women in the Labor Force; Work; Working‐Class Life and Culture.

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Joshua L. Rosenbloom