Page 52 - 6727

Economic Theory

Case Study

Henry Ford’s $5 Workday

In 1914 the Ford Motor Company started paying its workers $5 per
day. The prevailing wage at the time was between $2 and $3 per day, so

Ford’s wage was well above the equilibrium level. Not surprisingly, long
lines of job seekers waited outside the Ford plant gates hoping for a chance
to earn this high wage.

What was Ford’s motive? Henry Ford later wrote, “We wanted to pay
these wages so that the business would be on a lasting foundation. We
were building for the future. A low wage business is always insecure…

The payment of five dollars a day for an eight hour day was one of the
finest cost cutting moves we ever made.”
From the standpoint of traditional economic theory, Ford’s
explanation seems peculiar. He was suggesting that high wages imply low

costs. But perhaps Ford had discovered efficiency-wage theory. Perhaps he
was using the high wage to increase worker productivity.
Evidence suggests that paying such a high wage did benefit the

company. According to an engineering report written at the time, “The
Ford high wage does away with all the inertia and living force resistance…
The workingmen are absolutely docile, and it is safe to say that since the
last day of 1913, every single day has seen major reductions in Ford shops’

labor costs.” Absenteeism fell by 75 percent, suggesting a large increase in
worker effort. Alan Nevins, a historian who studied the early Ford Motor
Company, wrote, “Ford and his associates freely declared on many

occasions that the high wage policy had turned out to be good business. By
this they meant that it had improved the discipline of the workers, given
them a more loyal interest in the institution, and raised their personal

efficiency.”

ASSIGNMENTS

Review Questions

1. What is the difference between being unemployed and being out of
the labor force?

52