As globalisation reshapes economies, the labour market’s ability to adapt becomes a critical concern for policymakers. Much of the recent focus has been on the negative local consequences of trade shocks, such as the China shock in the United States. Yet, looking to history reveals a different picture. Our study examines how rural labour markets in Prussia responded to a major trade shock during the first globalisation (1870–1913)—the so-called “grain invasion,” when cheap grain from the Americas flooded European markets.
In our work, we find that trade shocks led to significant regional economic decline as measured by local employment rates. However, the mechanism of adjustment differs sharply from recent experiences. Instead of long-term stagnation or political backlash, workers responded through internal migration. Affected counties saw a drop in population, as people moved to growing industrial cities.
These migration patterns mattered. By applying an economic geography model, we show that cities with pre-existing migration ties to shocked counties absorbed displaced rural workers. Urban labour markets provided low-skill employment that enabled workers to transition away from declining agricultural sectors. Rural areas also showed signs of adaptation, shifting toward livestock farming—less vulnerable to international competition.
What sets this period apart is the relatively smooth reallocation of labour. Unlike the polarised political outcomes observed in contemporary trade shocks, we find no evidence of rising extremism or protectionist backlash in Prussia. This underscores the importance of internal mobility in mitigating the disruptive effects of global economic change.
For today’s policymakers, the historical lesson is clear: mobility matters. When workers can move to areas with better job prospects, the broader economy can adjust more effectively to shocks. But this requires policies that reduce frictions—jobs suitable for workers affected by a globalization shock, affordable housing in booming cities, retraining programs, and transport infrastructure that connects regions. The experience of 19th-century Prussia reminds us that globalisation need not create enduring local decline and political polarisation—if labour markets can adjust.
This study published The Economic Journal:
Bräuer, R., & Kersting, F. (2024). Trade shocks, labour markets and migration in the first globalisation. The Economic Journal, 134(657), 135-164.
