A:

Industrialization is the transformation of a society from an agrarian economy to an industrial one. Industrialization has enormously positive impacts on wages, productivity, wealth generation, social mobility and standard of living. During industrialization, all wages tend to rise, though the wages of some rise much faster than others.

The impact of industrialization can be understood by looking at historical data or by reviewing its logical economic consequences. Standard of living, traditionally measured as real income per person, increases exponentially during and after industrialization.

Wages Before Industrialization

According to researchers at the Minneapolis Fed, gross domestic product (GDP) per capita was essentially unchanged from the rise of agricultural societies until 1750; they estimate a per capita income of $600 for this period (using 1985 dollars).

In countries such as Japan, the United Kingdom and the United States – where economic policies allowed for the greatest industrialization – per capita income exceeded $25,000 (in 1985 dollars) by 2010.

The World Health Organization defines "absolute poverty" as living on less than $2 per day, although other definitions range between $1.25 and $2.50. By these standards, the average individual in every society in the world lived in absolute poverty until 1750.

Work in agrarian life often involved working as long as the sun was up, only stopping because there was no more light. Workers often lived at the behest of their lords (whatever their title). Children were expected to begin working at a very young age, and most people were not allowed to keep the fruits of their labor. Productivity was chronically low. This changed with the Industrial Revolution.

The Industrial Revolution

Large-scale industrialization began in Europe and the U.S. during the late 18th century following the adoption of capitalist economic principles. Under the influence of thinkers such as John Locke, David Hume, Adam Smith and Edmund Burke, England became the first country to emphasize individual property rights and decentralized economies.

Under this philosophy, known as classical liberalism, England experienced the earliest industrial development. Low levels of public spending and low levels of taxation, along with the end of the Mercantilist Era, sparked an explosion in productivity. Real wages in England grew slowly from 1781 to 1819 and then doubled between 1819 and 1851.

According to economist N.F.R. Crafts, income per person among the poorest increased 70% in England between 1760 and 1860. By this time, industrialization had reached most of Europe and the U.S.

The replacement of agricultural life was dramatic. In 1790, farmers made up 90% of the labor force in the U.S. By 1890, that number fell to 49% despite a much higher level of output. Farmers made up just 2.6% of the U.S. labor force by 1990.

The Economics of Industrialization

Prior to the rise of classical liberalism, much of the wealth generated by a worker was taxed. Very little was invested in capital goods, so productivity remained very low.

Capital development became possible once private individuals could invest in competing corporations and entrepreneurs could approach banks for business loans. Without these, merchants could not afford to innovate or develop superior capital goods. Mass production led to cheaper goods and more profits.

Workers are more productive with industrialization's capital goods, and companies have an incentive to bid up wages towards marginal revenue product when they compete for laborers.

RELATED FAQS
  1. What caused the American Industrial Revolution?

    Read about the causes of the American Industrial Revolution, from the first textile mill and through the rise of the corporation. Read Answer >>
  2. Why is productivity an important concept in economics?

    See why the concept of productivity is so crucial to understanding economic growth, and why a standard of living directly ... Read Answer >>
  3. What is 'capital' in relation to the factors of production?

    Find out what economists mean by physical capital, how it contributes to the productivity of labor and why it is a crucial ... Read Answer >>
  4. Which states have the lowest minimum wage?

    Learn which two states share the lowest state minimum wage and are also the only two that sit below the required federal ... Read Answer >>
  5. Does raising the minimum wage increase inflation?

    Explore whether raising the minimum wage increases inflation. This is a polarizing topic that is inherently linked to unemployment. Read Answer >>
  6. What developed countries have the largest proportion of industrial companies?

    Examine the industrial sector in developed countries, and learn about the shift in manufacturing production to emerging market ... Read Answer >>
Related Articles
  1. Insights

    Good News: Long-Awaited Wage Growth is Finally Happening

    American wages reached record levels last year--and not just for the wealthy.
  2. Personal Finance

    Minimum Wage: Good Cause Or Economic Pariah?

    Here are some positives and negatives to help you decide where you stand on the minimum wage debate.
  3. Insights

    What Are the Pros and Cons of Raising the Minimum Wage?

    With the debate on wages continuing in Congress and in the public arena, here are some of the major pros and cons of raising the minimum wage.
  4. Insights

    The Economics of Labor Mobility

    Loosening labor restrictions, which allows for geographic and occupational mobility, has both good and bad effects on a country and its workers.
  5. Insights

    Opinion: Trump's Lament That He 'Inherited a Mess' of an Economy? False! Sad!

    So much for The Donald’s ‘Crippled America,’ as new numbers show incomes soaring under Obama.
  6. Investing

    3 Emerging Markets With Bright Prospects

    Learn about emerging and developed Asian markets, their economic machines, and which key factors contribute to real and per capita GDP growth.
  7. Insights

    Minimum Wages Can Raise Unemployment

    Learn why many economists feel that minimum wages, while intended to benefit low-wage workers, actually hurt them by increasing unemployment.
  8. Insights

    One Reason Jobs Shrink: Superstar Companies

    Are superstar companies that dominate their industries but employ relatively few workers to blame for labor’s falling share of GDP?
  9. Insights

    Why Minimum Wage Is a Kingmaking Issue in Elections

    Minimum wage is an essential issue for presidential candidates in the lead-up to the 2016 election. We look at the reasons why.
RELATED TERMS
  1. Developed Economy

    A developed economy is an economy with sustained economic growth, ...
  2. Labor Market

    The labor market refers to the supply and demand for labor in ...
  3. Indexed Earnings

    A worker's past wages that have been adjusted for changes in ...
  4. Per Capita

    A Latin term that translates into "by head," basically meaning ...
  5. Minimum Wage

    The minimum wage is a legally mandated price floor on hourly ...
  6. Income Per Capita

    Income per capita is a measure of the amount of money that is ...
Hot Definitions
  1. Receivables Turnover Ratio

    Receivables turnover ratio is an accounting measure used to quantify a firm's effectiveness in extending credit and in collecting ...
  2. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  3. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  4. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  5. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  6. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
Trading Center