Economists differentiate free and forced labor as if there were no room in between. Yet history shows many examples of “intermediate” labor market institutions that fall outside this simple dichotomy. These historical labor markets have rarely looked like the textbook free markets.
INET grantee Suresh Naidu breaks new ground in his recently published study that looks at the nature of freedom and contracts from a historical prospective. Naidu and co-author Noam Yuchtman look at one of these intermediate intitutions in 19th century Britain - British Master and Servant law, which made employee contract breach a criminal offense until 1875. Published in the influential American Economic Review, the study shows how this form of coercion by criminal sanction affects the labor market and its response to labor demand shocks.
Their work explores the role legal institutions play in determining the supply of labor and illuminates an area rich for future study of the many and diverse institutions that affect labor mobility.
To download the paper from the AER, click here.
British Master and Servant law made employee contract breach a criminal offense until 1875. We develop a contracting model generating equilibrium contract breach and prosecutions, then exploit exogenous changes in output prices to examine the effects of labor demand shocks on prosecutions. Positive shocks in the textile, iron, and coal industries increased prosecutions. Following the abolition of criminal sanctions, wages differentially rose in counties that had experienced more prosecutions, and wages responded more to labor demand shocks. Coercive contract enforcement was applied in industrial Britain; restricted mobility allowed workers to commit to risk-sharing contracts with lower, but less volatile, wages.