￼￼￼￼￼Since the Reform Act of 1832 the most important social issue in England has been the condition of the working classes, who form the vast majority of the English people. . . What is to become of these propertyless millions who own nothing and consume today what they earned yesterday?... The English middle classes prefer to ignore the distress of the workers and this is particularly true of the industrialists, who grow rich on the misery of the mass of wage earners. Friedrich Engels, The Condition of the Working Class in England in 1844, pp. 25–26.

Engels’ Condition of the Working Class in England in 1844 (1845) was an early and famous account of unequal development. He describes how the industrial revolution led to massive urbanisation and great increases in output. While per capita income was rising, real wages remained constant, however, so the gains from economic development accrued overwhelmingly to capitalists. The period of constant wages in the midst of rising output per worker was ‘Engel’s pause’. The pause had a progressive side, however, for the bourgeoisie saved from its growing income, and the ensuing investment drove the economy forward. In this paper, I argue that Engel’s description of the industrial revolution was, in many respects, an insightful one....

The empirical point of departure is the comparison between the growth of output per worker and the real wage shown by the most widely used measures of these variables (Fig. 1). 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%.... 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 Engel’s wrote his famous book. The key question is: why did the British economy go through this two phase trajectory of development?....

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 Engel’s Pause, and the relationship between technology, capital accumulation, and wages is the problematic of this paper. 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....

The share of rent in national income declined gradually over the century. The shares of wages and profits exhibited conflicting trends. In the late 18th century, labour’s share was about 60%. It declined steadily until the middle of the 19th century to around one half. Then it rose steadily to a peak around 1900 when its value was back to its late 18th century level. Finally, labour’s share sagged again in the decade before the First World War. Capital’s share moved inversely, more than doubling from a late 18th century value of 20% to over 40% in the middle of the 19th century. It fluctuated around the level until the First World War....

There are two approaches to explaining these trends. The first attributes them to a series of accidents: bad harvests and the Napoleonic Wars raised agricultural prices in Britain and checked the growth of real wages at the beginning of the 19th century (Mokyr and Savin, 1976). The Corn Laws then kept food prices high until 1846 and prevented wages from rising. These unfavourable events were reversed after 1870 with the American grain invasion.... This paper... roots the macro trends in a model of the macro economy... [in which] technical change and capital accumulation govern the history of factor prices. It turns out that a simple model of this sort does a good job of explaining wage stagnation followed by wage acceleration. In view of that success, perhaps incidental features like the Corn Laws really were just incidental?...

A low elasticity of substitution between capital and labour reflected two important features of industrializing Britain. First, much of the investment was in social overhead capital (Feinstein, 1988, p. 431), and that did not admit much substitutability between capital and labour. The population was expanding, and industrialization meant urbanization. Each new job, in other words, required a large dollop of housing and infrastructure. The British industrial revolution was done on the cheap, so far as this kind of investment was concerned (Williamson, 1990), so these dollops were as small as possible and did not admit much substitutability with labour. As Britain was industrializing, capital was required in fixed proportion to labour, and that is what the low elasticity of substitution picks up. Later, when the urban structure was stabilized, the substitution of capital for labour at the plant level influenced the aggregate statistics more, and estimated elasticities of substitution were greater. Second, for many industries during the industrial revolution, there was little scope to substitute capital for labour even at the plant level. The implements of production in many industries were the same around the world irrespective of relative factor prices....

The most fundamental question is whether the model replicates the two phase pattern of British history.... Why did Britain exhibit the two stage inequality history that Lewis highlighted?.... The first stage of rising inequality was precipitated by the acceleration of technical progress after 1800 in conjunction with the low elasticity of substitution between capital and labour in the aggregate production function.... A higher rate of technical progress... reduced the ratio of capital to augmented labour.... With an elasticity of substitution less than one, the higher marginal product of capital translated into a higher share of capital in national income.... Inequality increased and the real wage stagnated. The first stage contained the seeds of its own undoing, however. As the share of profits increased, the economy-wide savings rate rose... capital accumulation accelerated.... Once steady state growth was achieved, so capital grew as rapidly as augmented labour, productivity growth boosted the real wage as well as GDP per worker.... The transition from the first stage to the second, which occurred around the time of the publication of the Communist Manifesto (1848), provides a wry commentary on Marx’s expectations. The acceleration of productivity growth did, indeed, shift income from workers to capitalists, as he expected. The result, however, was not continually increasing immiseration, for the capitalists invested a portion of their extra income and the increase in the capital stock eventually allowed rising productivity to be manifest as rising real wages. History did, indeed, exhibit a stage pattern of evolution, but the stage of flat real wages was followed by the most sustained rise in real wages ever seen--not by socialist revolution. The integrated growth model captures the logic of history.