Trade Shocks, Labor Markets and Elections in the First Globalization

This paper studies the economic and political effects of a large trade shock in agriculture – the grain invasion from the Americas – in Prussia during the first globalization (1871-1913). We show that this shock accelerated the structural change in the Prussian economy through migration of workers to booming cities. In contrast to studies using today’s data, we do not observe declining per capita income and political polarization in counties affected by foreign competition. Our results suggest that the negative and persistent effects of trade shocks we see today are not a universal feature of globalization, but depend on labor mobility. For our analysis, we digitize data from Prussian industrial and agricultural censuses on the county level and combine it with national trade data at the product level. We exploit the cross-regional variation in cultivated crops within Prussia and instrument with Italian trade data to isolate exogenous variation.