The origins of technology-skill complementarity.

The recent coincidence of computerization and a widening wage structure has led many to conclude that new technologies and human capital are relative complements and that large injections of education may be necessary to reduce the impact of advancing technology on inequality.(1) In a related literature, physical capital and skill have been shown to be relative complements both today and in the recent past.(2) These findings, taken together, have prompted a widely noted conjecture that technological progress and skill have always been relative complements.(3) Even though physical capital and more advanced technologies are now regarded as the relative complements of human capital, were they so in the more distant past?

Some answers have already been provided. A literature on the bias to technological change across history challenges the view that physical and human capital were relative complements throughout the industrial past. Many of the major technological advances of the nineteenth century, according to this literature, substituted physical capital, raw materials, and unskilled labor, as a group, for highly skilled artisans.(4) Rather than being the relative complement to skill, physical capital was, for some time, a relative complement of raw materials and, together with unskilled labor, substituted for highly skilled individuals [Cain and Paterson 1986; James and Skinner 1985].(5) The prototypical example is gun making. Cheap lumber in America fostered the use of wood lathes and displaced hand fitting in the production of gun stocks by skilled woodworkers [Hounshell 1984]. The butcher, baker, glassblower, shoemaker, and smith were also skilled artisans whose occupations were profoundly altered by the factory system, machinery, and mechanization.(6)

If technological advance and human skill were not relative complements in the distant past but are today, when did they become so? We argue that technology-skill complementarity emerged in manufacturing early in the twentieth century as particular technologies, known as batch and continuous-process methods of production, spread. The switch to electricity from steam and water-power energy sources was reinforcing because it reduced the demand for unskilled manual workers in many hauling, conveying, and assembly tasks.

We postulate that manufacturing production, for certain products, began in artisanal shops, then shifted to factories (1830s to 1880s), to assembly lines (early 1900s), and more recently to robotized assembly lines.(7) For other types of goods, however, the shift may have been from artisanal shops or factories to continuous- and batch-process methods (1890s and beyond).(8) The production process shifts did not affect all goods similarly, and some were never manufactured by more than one method. But manufacturing as a whole progressed in the fashion we posit: from artisanal shops, to factories (also assembly lines), and then to continuous-process (also robotized assembly-line) or batch methods.

We have in mind rather distinct notions for each process, following a rich literature in the histories of technology and business. The distinction between the artisanal shop and factory is mainly in the degree of division of labor. Factories are larger, with more specialized workers and often more capital per worker. Batch operations are used for processing liquid, semisolid, or gaseous matters (e.g., chemicals, liquors, dairy products, molten metals, wood pulp). Continuous-process methods, pioneered in the late nineteenth century, are used for products requiring little assembly and having few or no moving parts, such as oats, flour, canned foods (e.g., condensed milk, soup), soap, film, paper, matches, and cigarettes. Continuous-process and batch methods (e.g., Bonsack's cigarette machine, Fourdrinier papermaking machine) are 'black-box" technologies, precursors of modern robotized assembly lines. Raw materials are fed in, and finished products emerge, with few hands intervening in production. A corps of machinists and mechanics, however, attend the machinery. Assembly lines, including their robotized versions, generally produce goods constructed from solid components. Note, however, that assembly lines differ in important ways from continuous-process (and batch) methods. Assembly lines, with their vast quantities of human operatives, are the fully rationalized versions of the factory, with its extreme division of labor.

Few products went through all the stages we describe, but those that did are illuminating. Automobile production began in large artisanal shops. Like the carriages that preceded them, automobiles were first assembled by craftsmen who hand-fitted the various pieces.(9) Technological advances then led to standardized and completely interchangeable parts that were assembled in factories, later equipped with assembly lines as at Ford in 1913, by scores of less-skilled workers. Much later, the robotized assembly line appeared using relatively fewer less-skilled operatives and more skilled machine-crewmen. In the history of automobile production, the first technological advances reduced the relative demand for skilled labor, whereas later advances increased it.

The question we address is how these technological shifts affected the relative demand for skill. The transition from the artisanal shop to factory production probably increased the capital-output ratio, but most likely decreased the demand for skilled relative to unskilled labor in manufacturing. The technological advances that later shifted production from the factory (or assembly line) to continuous-process methods further raised the capital-output ratio but also served to increase the relative demand for skilled labor. Reinforcing these technological shifts was electrification, the adoption of unit-drive systems, and the automation of hauling and conveying operations which decreased the demand for "common laborers."(10)

Our central point is that the technological shift from factories to continuous-process and batch methods, and from steam and water power to electricity, may have been at the root of an increase in the relative demand for skilled labor in manufacturing in the early twentieth century.(11) We explore the origins of the transition to technology-skill complementarity, believed to be in full blossom today.(12)

We begin with a formal statement of our framework and the conditions under which the technological changes we have in mind will increase the relative demand for skill. We emphasize that our model applies to manufacturing and that our evidence is also primarily confined to that sector. Manufacturing employed 32.4 percent of the nonagricultural labor force in 1910 and 29.1 percent in 1940 [U.S. Department of Commerce 1975, series D152-166]. The sector, moreover, affords the measurement of inputs, outputs, and technological change over a long period.

Our framework predicts that industries adopting advanced technologies (e.g., continuous-process and batch methods) in the first part of this century should have employed production workers with higher average skills and a larger share of nonproduction (white-collar) workers. They should have been more capital-intensive and relied on purchased electricity for a larger share of their horsepower. We assess these predictions using the earliest available national data on the educational levels of workers by industry (viz., the 1940 U.S. census of population) and data on the characteristics of detailed industries (from the 1909, 1919, and 1929 censuses of manufactures).

We document substantial differences in the education levels of blue-collar production workers by industry in 1940 that cannot be attributed to the geographic distribution of production. Industries in 1909, 1919, and 1929 with more-skilled blue-collar workers (proxied by contemporaneous mean wages for production workers and education levels for blue-collar workers by industry in 1940) had more capital per worker and used purchased electricity to power a greater fraction of their horsepower. Many of the industries our data reveal to be capital-intensive and high-education have been classified elsewhere as using continuous-process and batch methods [Chandler 1977]. We also examine within-industry changes from 1909 to 1919 and find a positive relationship between changes in capital-intensity and purchased electricity utilization, on the one hand, and the wage-bill share of white-collar workers, on the other.

Overall, the evidence we present from both across- and within-industry analyses of data for 1909 to 1940 is consistent with the notion that the transition from the factory to continuous-processes increased the relative demand for skilled workers. The previous transition, from the artisanal shop to the factory, appears to have involved an opposite force. Many industries that remained artisanal (e.g., engraving, jewelry, clocks and watches) had far lower capital intensity but higher worker skill (education) than the majority that shifted to factory production.

I. A FRAMEWORK TO UNDERSTAND TECHNOLOGY-SKILL COMPLEMENTARITY

In considering our argument, that shifts between production processes change the relative demand for skill, it is useful to envision manufacturing as having two distinct stages: a machine-installation and maintenance segment (termed "machine-maintenance") and a production or assembly portion (termed "production"). The two stages together comprise "manufacturing." Capital and skilled (educated) labor, we will argue, are always complements in the machine-maintenance segment of manufacturing for any technology. Machinists, for example, are needed to install machinery and make it run.(13) The "workable" machines created by skilled labor and raw capital are then used by unskilled labor to create the final product in the production or assembly segment of manufacturing.

The adoption of a particular technology may increase or decrease the capital to output ratio. Whether or not its adoption increases or decreases the relative demand for skilled workers will depend on the degree to which the demand for skilled labor in machine-maintenance is offset by the demand for unskilled labor in production. We outline a more formal framework showing that the transition from the artisanal shop to the factory probably increased the capital-output ratio but decreased the demand for skilled relative to unskilled labor. The shift from the factory to continuous-process (or batch) methods, however, raised the capital-output ratio and increased the relative demand for skilled labor. But within any technology (artisanal, factory, continuous-process) an increase in the ratio of unskilled to skilled wages will always induce an increase in the capital-output ratio, the capital-labor ratio, and the relative employment of skilled labor.

Our framework posits three technologies (one with two phases): the artisanal shop or hand production (H), the factory (F) which has a technologically advanced stage called the assembly line (A), and continuous-process or batch (C) methods.(14) There are three inputs: raw (or physical) capital (K), skilled or educated labor ([L.sub.s]), and unskilled labor ([L.sub.u]), with corresponding prices r, [w.sub.s], and [w.sub.u]. The manufacturing process contains two distinct segments: (1) raw capital must be installed and maintained, ("machine maintenance") and (2) goods must be assembled or created ("production"). All workers in the "production" segment are unskilled, whereas all workers in "machine-maintenance" are skilled. The machine-maintenance portion is Leontief, and, thus, physical capital and human capital are always strict complements in the creation of usable, workable machines for all technologies (H, F or A, and C). The usable, workable machines are [K.sup.*].(15) The production portion of manufacturing uses [K.sup.*] and [L.sub.u] to manufacture Q and is Cobb-Douglas. Thus, the creation of [K.sup.*] is a separable part of Q production.(16)

The various technologies differ in straightforward and relatively intuitive ways. Consider first the differences in the creation of [K.sup.*]. Factories and continuous-process methods do not necessarily require different ratios of skilled labor to capital to create workable machines, but the artisanal shop, in which each artisan maintains his own tools, has a higher ratio. Thus, we assume that the same factor proportions are needed to create [K.sup.*] in the F (or A) and C technologies, but that the H technology requires a larger amount of [L.sub.s] relative to K (as in [ILLUSTRATION FOR FIGURE I OMITTED], Part A). In the production of Q, however, each of the technologies requires a different ratio of unskilled labor to workable capital. The greatest is in the factory (and assembly line), the next is for continuous-process methods, and the least is in the artisanal shop, which used little unskilled labor. Thus, production of Q using the H technology is the most intensive in [K.sup.*], next is C, and last is F (or A), as in Figure I, Part B.(17) More formally, we assume that [K.sup.*] is generated by

(1) [Mathematical Expression Omitted]

such that [Mathematical Expression Omitted], and [Mathematical Expression Omitted], where [Mathematical Expression Omitted], for example, is the unit skilled-labor requirement for [K.sup.*] creation in production process i. Q production is, likewise, given by

(2) Q = [[Gamma].sub.i] [multiplied by] [([L.sub.u]).sup.[[Alpha].sub.i]] [([K.sup.*].sup.(1-[[Alpha].sub.i])] i = H, F, A, C

such that [[Alpha].sub.H] [less than] [[Alpha].sub.C] [less than] [[Alpha].sub.F, A].

Even though skilled labor and capital are strictly complements in machine-maintenance for all technologies, as in equation (1), a change in technology (meaning production process) need not increase the relative demand for skilled labor.(18) The reason can be seen with reference to Figure I (see also Table I). Part B of Figure I is drawn so that all isoquants represent equal amounts of Q. It has also been drawn for a very special case of [K.sup.*] production, one in which the average cost of [K.sup.*] for all technologies is the same (and thus for which all isocost lines in part B are parallel). If [Mathematical Expression Omitted] is the average cost of [K.sup.*] for technology i, the condition for which [r.sup.*] is equal for the H and F (or A or C) technologies is

(3) [Mathematical Expression Omitted].

That condition, although not necessary for our results, makes the [TABULAR DATA FOR TABLE I OMITTED] geometry far simpler.(19) Without it we will need a less restrictive condition for one of the results.

Consider the factory system to be in its infancy in period 0, at which time continuous processes will not have been invented and the artisanal shop is the dominant mode of production. We begin, therefore, at point [H.sub.0] with production taking place only in the artisanal …