Consider a time period of several decades when there is a high level of technological progress, but typical wage levels remain stagnant while profits soar, driving a sharp rise in inequality. In broad-brush terms, this description fits the US economy for the last few decades. But it also fits the economy of the United Kingdom during the first wave of the Industrial Revolution in the first half of the 19th century.
Economic historian Robert C. Allen calls this the \”Engels\’ pause,\” because Friedrich Engels, writing in books like The Condition of the Working Class in England in 1844, described this confluence of economic patterns. Allen laid out the argument about 10 years ago in \”Engels’ pause: Technical change, capital accumulation, and inequality in the British industrial revolution,\” published in Explorations in Economic History (2009, 46: pp. 418–435).
Allen summarizes his argument about the arrival and then the departure of the Engels\’ pause in this way:
According to the Crafts-Harley estimates of British GDP, output per worker rose by 46% between 1780 and 1840. Over the same period, Feinstein’s real wage index rose by only 12%. It was only a slight exaggeration to say that the average real wage was constant, and it certainly rose much less than output per worker. This was the period, and the circumstances, described by Engels in The Condition of the Working Class. In the next 60 years, however, the situation changed. Between 1840 and 1900, output per worker increased by 90% and the real wage by 123%. This was the ‘modern’ pattern in which labour productivity and wages advance at roughly the same rate, and it emerged in
Britain around the time Engels wrote his famous book.
The key question is: why did the British economy go through this two phase trajectory of development? … Between 1760 and 1800, the real wage grew slowly (0.39% per annum) but so did output per worker (0.26%), capital per worker, and total factor productivity (0.19%). Between 1800 and 1830, the famous inventions of the industrial revolution came on stream and raised aggregate TFP growth to 0.69% per year. This technology shock pushed up growth in output per worker to 0.63% pa but had little impact on capital accumulation or the real wage, which remained constant. This was the heart of Engels’ Pause … In the next 30 years 1830–1860, TFP growth increased to almost one percent per annum, capital per worker began to grow, and the growth in output per worker
rose to 1.12% pa. The real wage finally began to grow (0.86% pa) but still lagged behind output per worker with most of the shortfall in the beginning of the period. From 1860 to 1900, productivity, capital per worker, and output per worker continued to grow as they had in 1830–1860. In this period, the real wage grew slightly faster than output per worker (1.61% pa versus 1.03%). The ‘modern’ pattern was established.
In short, technological growth first led to a period where wages did not keep up with economic growth, and then to a period where wages rose faster than economic growth.