‘It’s not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages’ (Henry Ford, cited in Johnson and Weinstein 2004, p. 2). When the Ford Motor Company announced that it would more than double the wages of its workers in January 1914 to a ‘five-dollar day’ minimum, was this a contradiction to Henry Ford’s statement? If customers are actually the ultimate payers of wages, then more than doubling these wages can only be justified if, in some other way, it generates an equal or superior amount of value (either through a better product, lower costs, or both). According to the theory of incentives and efficiency wages, this is indeed the case, and Henry Ford even asserted that this decision was one of the best-cost cutting judgements they ever made (Raff and Summers 1987). This paper will outline the history of Ford Motor’s 1914 decision and relate it to the theory of incentives and efficiency wages.
The decision to implement the five-dollar day minimum wage at Ford Motor came at a moment when the firm’s labour force had expanded more than thirty-fold in the previous six years. Output had risen twenty-five-fold in the previous five years and worker tasks had become increasingly menial and repetitive, with no room for discretion. This led to widespread employee dissatisfaction, with turnover reaching 370 per cent in 1913 (this was extremely high relative to other firms and industries). This level of turnover has been attributed to wage inequities and inadequate work conditions apart from job monotony. Absenteeism also soared. There were no formal vacations for the working class; therefore voluntary lay-offs could be seen as their replacement. Despite all these problems, Fo...
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