The virtuous cycle between skills and technology

We examine the long-term labor market impact of the steam engine, an early general-purpose technology, by linking newly digitized 19th-century records from Prussia to modern German labor market data (1975-2019). Regions with a higher concentration of steam engines per worker in 1875 exhibit higher wages today, primarily because of higher firm productivity and a more skilled workforce. These regions also exhibited greater skill diversity in 1939 and generated more innovations between 1877 and 1918, a pattern that persists to this day. Our findings highlight a lasting, self-reinforcing cycle between technology and skills, set in motion by the steam engine, offering a novel explanation for regional income disparities and their persistence.