In 1700 about 250,000 European colonists and enslaved Africans lived in North America, primarily along a thin strip of land bordering the Atlantic Ocean. By 1870 these scattered colonial settlements had been consolidated into two continental nations – the United States and Canada – with a combined population of more than 40 million. Although agriculture remained the leading employer in North America in 1870, the rapid growth of industry was transforming these nations into increasingly urban and industrial societies and contributing to the accelerating growth of living standards. This chapter locates the sources of this remarkable growth in the interactions of abundant natural resources, a responsive economic and political system, and sustained technological progress. Yet the story of these years is not solely one of economic success. From the perspective of the aboriginal peoples of North America, European settlement and expansion had tragic consequences. So, too, the experience of enslaved Africans and their descendants was one of remarkable hardships. Slavery proved a source of continuing political tensions that resulted in a destructive and costly civil war and left a legacy of racial segregation and tensions that are still palpable today.

Networks of friends and relatives were the dominant channels of information and assistance in late-nineteenth and early-twentieth century labor markets. The information and assistance they provided directed the vast majority of long-distance migration and played an important role in the local allocation of labor as well. Nonetheless, the number and importance of employment agencies and labor exchanges did grow during the late-nineteenth century. The expansion of labor market intermediaries and other complementary businesses serving job seekers provided an important complement and extension to kin- and friendship-based networks that helped to encourage and expand European immigration in the decades after the Civil War. Their services were advertised in Europe by agents for steamship lines carrying passengers and were publicized through newspapers and other media. For potential immigrants who lacked well-placed friends and family to assist them in finding a job in the United States, the knowledge that there were employment agencies and other businesses to assist them upon arrival must have served to lower the expected costs of movement. At the same time, the rising volume of migration encouraged employers' continued reliance on immigrant labor. The mutually reinforcing nature of these decisions by immigrants and employers was central to the perpetuation of the geographic patterns of labor recruitment that had emerged in the decades before the Civil War.

Understanding the operation of the labor market intermediaries that emerged over the nineteenth century sheds considerable light on the broader issue of how labor market institutions worked at that time.

The discussion in the last two chapters concentrated on the development of mechanisms of external recruitment. Recruitment from outside the firm was, by definition, the only source of unskilled labor available to employers. Employers seeking to hire skilled labor could also hire workers on the external market, selecting them from job seekers at the factory or actively recruiting workers either through their own agents or by using employment agencies and public labor exchanges. But employers seeking to fill skilled positions possessed several additional alternatives not available to employers of unskilled labor. They could choose to train workers within the firm and fill skilled vacancies through internal promotions, or they could modify the production process to reduce or alter skill requirements. During the late-nineteenth and early-twentieth centuries, employers pursued all these options to varying degrees. This chapter explores the interactions between these different choices, arguing that employers' responses to the relative scarcity of skilled workers in external markets were an important factor encouraging the reorganization of labor allocation and training within firms at this time.

External recruitment of skilled labor was possible only in occupations characterized by a well-defined and reasonably stable cluster of skills, the possession of which could be easily documented or verified by potential employers. In these instances, a variety of different mechanisms emerged to organize external markets. Because of the strategic value of labor market information in influencing employment conditions, however, control over these mechanisms emerged as an important point of contention between workers and employers.

Between the Civil War and World War I, the effects of emancipation in the South, ongoing transportation improvements, the continuing process of western settlement, increasing urbanization, and industrialization combined to produce a spatially unbalanced pattern of economic growth in the United States. The previous chapters have examined how labor market institutions developed in response to the resulting imbalances between the supply of and the demand for labor. This chapter examines wage and earnings data to provide an assessment of how well these institutions worked in promoting geographic mobility and creating a broad, geographically integrated labor market.

Based on a broad range of evidence, it appears that the market institutions that emerged in response to American industrialization produced a remarkable but uneven expansion of labor market boundaries. By the 1880s, cities throughout the Northeast and Midwest were part of a single, effectively unified market. This market was, in turn, closely linked to labor markets in northern Europe. A parallel process of integration is also apparent between the eastern and western regions of the American South. Yet, interregional and international market integration coincided with the persistent isolation of northern and southern labor markets from one another.

The message of this chapter is twofold. First, markets worked well. As economic theory suggests, competitive forces created strong pressures toward wage equalization. Presented with opportunities for spatial arbitrage between regions with relatively abundant labor and regions with relatively scarce labor, market participants developed effective institutions to mobilize labor.

The integration of local labor markets into broader regional and national labor markets during the nineteenth century increased competitive pressures on wages and working conditions (Commons et al. 1918, pp. 43–4; Lebergott 1964, pp. 132–6). As the tendency for wage equalization documented in Chapter 5 illustrates, the scope for local variations in the terms of employment declined. In many industries, the competitive pressures caused by increased market integration were further compounded by technological changes that encouraged the increasingly fine division of labor and enabled employers to replace skilled craft workers with semiskilled operatives or unskilled laborers. The impact of these developments on American workers was profound. Broader labor markets and technological changes expanded employment opportunities for some workers, but for others they undermined efforts to increase wages and improve working conditions.

The increasing elasticity of labor supply resulting from the geographic integration of labor markets severely constrained unions' efforts to improve wages and working conditions. Having won higher wages and more control over piece rates in 1881, for example, carpenters in St. Louis found that “our advances in wages would soon be lost through the influx of men from cities where wages were lower. Day after day men came from other states where wages were $1.75 to $2” (quoted in Tygiel 1981, p. 366). A skilled butcher in Chicago put the matter more bluntly, observing simply that the threat of being replaced by less-skilled workers was “the club held above our heads at all times” (quoted in Tuttle 1969, p. 412).

This book grew out of my desire to understand how markets arise and how they work. Market processes of exchange are central to modern economics, and the development of efficient markets is widely regarded as an important factor in the speed of American economic growth. Yet the way in which markets develop, and the institutions through which they accomplish the task of matching supply and demand are rarely addressed by economists. In the pages that follow, I describe the development of American labor market institutions during the late-nineteenth and early-twentieth centuries, focusing in particular on the ways in which they facilitated the matching of job seekers and employers across space. During this period, the industrialization of the American economy was associated with both substantial growth in aggregate employment and marked shifts in the location of economic activity. These developments would not have been possible in the absence of market institutions capable of mobilizing labor both internationally and internally.

My primary goal has been to contribute to our understanding of the process of American economic growth by illuminating the way in which labor markets responded to the shifting locations of labor supply and demand during American industrialization. But I believe that the results of this study have broader significance. For economists, this study offers an illustration of the interplay of economic and historical forces in explaining the development of institutions.

Understanding how labor was mobilized in response to the shifting pattern of labor demand created by industrialization requires an examination of the mechanisms that labor market participants created to convey information and facilitate transactions between job seekers and employers. A complete account of these institutions would require considering all the transactions that took place in the labor market. Since the late 1920s, a number of studies have attempted to do just this through surveys of workers in particular industries or locations (De Schweinitz 1932; Myers and Maclaurin 1943; Myers and Shultz 1951; Reynolds 1951; Rees and Shultz 1970; Granovetter 1974; and Corcoran, Datcher, and Duncan 1980). The sources available for the nineteenth century will not support such an investigation; nonetheless, it is possible to piece together from a variety of alternative sources a relatively clear picture of how labor markets worked and how they responded to the challenges created by American economic growth in this period. The account that emerges from these sources lacks some of the quantitative precision of more recent surveys, but it more clearly reveals the dynamics of labor market evolution over time than is possible based on the sort of snapshot picture provided by most worker surveys.

It is apparent from the available sources that, as is true today, most labor market information was communicated through “informal” networks of friends and relatives. When in place, such networks provided a highly efficient and low-cost mechanism of conveying labor market information.

On August 8, 1904, John Achzener met a man on the street in Baltimore who asked him if he “wanted to go along with some other men to Chicago to work as butchers at $ 2.25 a day.” After inquiring if there was a strike and being assured that there was not, Achzener accepted the offer and boarded a train for Chicago. When William Rees, a weaver living in Philadelphia, needed work, he would walk from one employer to the next seeking a job, sometimes traversing four miles or more on his rounds. At other times he would get lucky and “stumble in just when they need[ed] a weaver” (Licht 1992, p. 1). In December 1915, the superintendent of the Robesonia Iron Company, located in Pennsylvania, wrote to Thomas Armato of the Industrial Labor Agency, an employment agency in Brooklyn, to inform him that “we expect to extend our operations soon, and will likely want more men. At our quarry we have mostly Italians, and here nearly one half foreigners, of whom about one half are Italians and one half Slavonians.”

These transactions between employers and job seekers, and millions of others like them, were all part of the operation of American labor markets during the late-nineteenth and early-twentieth centuries. Economists often use the term “market” to describe a group of buyers and sellers of a particular good or service or to refer to the transactions that take place between these buyers and sellers.