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  3. People and Machines: A Look at the Evolving Relationship between Capital and Skill in Manufacturing, 1860–1930, Using Immigration Shocks

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People and Machines: A Look at the Evolving Relationship between Capital and Skill in Manufacturing, 1860–1930, Using Immigration Shocks

  • person Jeanne Lafortune

    José Tessada; Ethan Lewis

  • class Review of Economics and Statistics. Volume 101, Issue 1. March 2019. Pages 30-43

Abstract: This paper estimates the elasticity of substitution between capital and skill in manufacturing using immigration-induced variation in skill mix across U.S. counties between 1860 and 1930. We find that capital initially complemented both high- and low-skill labor (determined by literacy) and, unlike today, was more complementary with low-skill labor. Around 1890, capital increased its relative complementarity with high-skill labor. Simulations calibrated to our estimates imply the level of capital-skill complementarity after 1890 allowed the manufacturing sector to absorb the large wave of Eastern and Southern European immigrants with only a modest decline in less-skilled relative wages. This would not have been possible under the older production technology