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Abstract
This paper uses newly digitized data to study the effects of the Fair Labor Standards Act (FLSA) of 1938 on the industrial development of the U.S. South. Implemented at a time of large regional wage disparities, the federal minimum wage and maximum hour regulations disproportionately affected the low-wage South. Low-wage manufacturing industries experienced substantially higher wage growth but no significant reduction in employment one year after the new law came into effect. The original FLSA, however, excluded from coverage the agricultural sector, which was the largest employer in the South. To quantify the extent to which this sector-specific labor market regulation reallocate workers and shape regional development, this paper then builds a general equilibrium model and calibrates it to the spatial distribution of economic activities at the time. Employment, industrial composition, and interstate commerce are endogenously determined in general equilibrium, reflecting regional comparative advantage and sectoral production network. Labor market distortions that suppress worker compensations play a key role in determining the welfare consequences of reallocation. A reverse structural change that reallocates workers out of manufacturing and into agriculture reduces welfare by 6% absent distortions but by 20% if the documented low labor income shares are driven by labor market distortions.