North America Had an Head Start

In contrast to the catching-up thesis according to which North America lagged behind both Western Europe and Latin America during the colonial period and benefited from a reversal trend starting from the beginning of the 19^th century, the results presented by Tommy Murphy (IGIER and Centro Dondena), Robert Allen and Eric Schneider (University of Oxford) suggest that for much of the 17^th and 18^th centuries North America was already the most prosperous region of the world. North American living standards were in line with the ones offered in Northwestern Europe and were twice higher than the ones in Latin America, Southern Europe and Asia.

In their The Colonial Origins of the Divergence in the Americas: A Labour Market Approach (IGIER Working paper n. 402), Murphy and coauthors propose a comparison of living standards in North American, Latin American, European and Asian cities during the colonial period. Given the lack of satisfactory data on economic performance of the American continents and the fact that back then most incomes were returns to labour, the authors proxy living standards using measurements of real wages in these regions. They collect nominal wage rates and deflate them using self-constructed price indexes of consumer goods in order to assess the purchasing power of wages in various cities across time. Living standards series are then obtained by comparing labourers' annual incomes to the cost of supporting their families at subsistence level. An international comparison of these series leads to the conclusion that North America was already among the most advanced regions in the world from the outset of colonization.

The underlying market mechanism at work is as follows: with the aim of favoring immigration from European metropolis, colonies had to offer attractive wages covering the opportunity cost of leaving the origin country as well as the cost of migration. Therefore, prevailing wages in colonies must have followed those observed in Europe. Wages were considerably higher in England than in Spain, an observation that largely accounts for the wage differentials among British and Spanish colonies.

The authors investigate two other possible mechanisms which eventually turned out to have been of minor effect. First, the characteristics of the colonies (productivity, institutions, size of the Native labour force, geography, etc.) did not have a permanent influence on wages and welfare, and therefore, do not explain the gap in living standards between North and Latin America. Such characteristics strongly determined the development of the colonies, and thus, the labour demand within each colony. Through this channel, staple-led expansions or drops in the prices of slaves in North America temporarily raised wages above European levels. But subsequently, as migration flows from Europe grew, population swelled until wages dropped back wiping out the temporary improvement in living standards. Secondly, forced labour regimes in Mexico and Latin America might have depressed wages by raising the labor supply, a mechanism which did not take place in North America due to the weak substitution between slaves and white labour. However, this effect is expected to have been of minor impact as those labour regimes had lost their power by the early 17^th century.