Price convergence and wage divergence in South-Eastern Europe before the First World War

In this blog post, Stefan Nikolić of Loughborough University introduces his latest article for the Economic History Review, entitled ‘Spatial inequality in prices and wages within a late-developing economy: Serbia, 1863-1910’.

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Does price convergence always go hand in hand with wage convergence? Historical data from Serbia suggests not. In the fifty years before the first world war, as Serbia gained its independence from the Ottoman Empire and started to develop its economy, price gaps between Serbian towns were decreasing. At the same time, surprisingly, differences in wages between these urban settlements were increasing. Reductions in transport costs, fuelled by the construction of railways, helped prices become more similar across towns. But as some towns grew faster than others, wages diverged.

The convergence of prices and wages is a huge topic in economic history. The Balkans, however, have received scant attention in the literature thus far. This is not for a lack of data. Serbia possesses a uniquely-abundant treasure of data on prices and wages. Since the establishment of its statistical office (1862), Serbian authorities collected prices of traded and household goods, and wages of skilled and unskilled workers (masons and day labourers). Drawing on this source, I built a new database of prices and wages spanning 42 urban settlements in the period 1863-1910. The data enable me to investigate the development across space and over time of grain prices and costs-of-living, as well as nominal and real wages. The article, therefore, speaks to a wide audience by connecting to global debates on real wages, convergence, and economic development in Central and South-Eastern Europe. In this post, I highlight some of the main findings.

Notes: the figure reports average percentage gaps across all location-pairs for: (a) prices of maize and wheat; (b) money wages of day labourers and masons. Interpretation: for example, a value of 1.2 in sub-figure (a) means that the average gap in grain prices between all location-pairs was 20 per cent.

Figure 1 illustrates that as prices converged, wages diverged. Initial differences in grain prices of approximately 25% for maize and 20% for wheat more than halved during the next half a century. By 1910 inter-urban gaps in grain prices were as low as in Italy, indicating strong integration of domestic commodity markets by European standards. Meanwhile, wage gaps between Serbian urban settlements widened more strongly than elsewhere in Europe. During the half century studied here, on average, real wages between locations differed by approximately 30%. Dispersion in costs of living was low and relatively stagnant over time (c.10%, on average).

Falling transport costs helped prices converge, but growing differences in town size propelled wage divergence. From 1866 to 1910, the cost of freight transport in Serbia fell by a third. Transport costs strongly decreased with the appearance of railways in 1884 and continued to fall with the extension of the railway and road network. Improved transport infrastructure enabled domestic trade thus helping reduce inter-urban gaps in prices of grains and other tradable goods. Meanwhile, Serbia witnessed an increasing concentration of its urban population. Initial differences in the size of urban settlements increased over time. Between 1866 and 1910, in the span of 44 years, Belgrade’s population more than trebled while the population of several other locations more than doubled. By contrast, a number of locations grew slowly or even shrank. These agglomeration forces resulted in wages divergence, as wages grew more in more populous towns.

In sum, my research demonstrates that price and wage integration need not point in the same direction. The case of Serbia reveals that, in spite of converging prices, wage convergence can elude a small, developing economy. These findings may hold important lessons for developing economies today.

To contact the author:

Email: s.nikolic@lboro.ac.uk