The enduring legacy of the 1351 Statute of Labourers

Since the passage of the Statute of Labourers, issued in 1351 by Edward III after the Black Death,  it has been axiomatic among employers that wages have to be kept low.

During the 1347-49 plague a large proportion of labourers died and those left were able to command higher wages, thereby committing the egregious sin of damaging the wealth of the landed classes, who promptly appealed to the government.

It was still a sore point in 1381 when the co-called Peasants’ Revolt occurred, although strictly speaking it should be called the Essex Rising, and the people who revolted were mainly not peasants but tenant farmers.

Their major revolutionary act was seizing and burning documents related to leases and obligations (actions repeated in The French and other revolutions) and their major mistake was trusting the monarch’s word.

Today we don’t see discontented workers – at least not in the West – murdered, tortured, quartered, decapitated and hanged as they were in 1381.

But on any given day in the West you can hear employers, conservative governments and the media opining on how rising wages, or what they define as ‘overly-generous’ unemployment benefits, will lead to unemployment. They will be supported in these claims by any number of economists who can employ sophisticated models and theories to prove it is so.

The only problem is that it isn’t so. This year’s Sveriges Riksbank Prize in Economic Sciences went to three economists – John Angrist, Guido Imbens and David Card – for demonstrating that with real world evidence. The prize is actually considered a Nobel Prize but if you say that pedants argue that there isn’t one.

What they had pioneered was the use of ‘natural experiments’ to interrogate economic assumptions.

The Prize went to them for work which shows how causation can be inferred from observing data in real-world natural experiments. Specifically, in 1994 Card and Alan Kreuger (who has died and was thus not eligible to be awarded the prize) studied the impact of a minimum wage increase in New Jersey by comparing the change in employment there with that in neighbouring Pennsylvania where a wage floor stayed in place.

Theory – and employers – predicted that the wage rise would cause a drop in employment. Card and Kreuger compared the real world effects by surveying 400 fast-food restaurants in both States.

The theory was wrong because the New Jersey restaurants took on more workers.

What happened was that improved wages lured the poorest workers. Business owners benefitted from lower turnover and productivity improved.

After that study Card looked at the impact on employment in Miami after about half of the 125,000 Cubans who were allowed to leave in 1980 settled there. By comparing the Miami evidence with four other broadly similar cities, which didn’t have a migrant influx, neither the wages nor employment of native workers suffered.

Angrist and Krueger also used a similar approach to examine educational impact on labour market outcomes. They looked at the assumption that people who spent more time in education were more likely to earn more throughout their working lives and investigated whether this was due to natural ability or something else.

Essentially, they demonstrated the eternally misunderstood reality that correlation is not causation as in fact it was the time spent in school and that every extra year of education raised wages by 9%.

Angrist and Imbens, in a 1994 paper in J.D Econometrica said that these ‘natural experiments’ involve a factor called an ‘instrument’. This was a mathematical formalisation for extracting reliable information about causation from natural experiments even if their design is limited by unknown factors or incomplete compliance by participants. This approach illustrated which causal assumptions could or couldn’t be supported by a given situation.

Sadly this work is unlikely to change the worldview of many. As Keynes suggested, most practical men are in thrall to the ideas of some long dead economist. Or, if you prefer an alternative, “This is the West sir, and when the legend becomes fact, print the legend” says the reporter to the Governor who is returning to a town for the funeral of a friend,Tom Doniphon, in the final scenes of the 1965 film The Man Who Shot Liberty Valance.

With Alan Kreuger’s tragic suicide the world lost a great economist but also an original and often very entertaining one.