Henry Ford's Efficiency Wages

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  • Topic: Joseph Stiglitz, Labor economics, Efficiency wages
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Economics of Management Strategy| January 1
On 5th January 1914 the Ford Motor company announced that it would more than double the wages of its workers. Briefly describe the history of this decision and relate to the theory of incentives and efficiency wages.| Assignment 1|

Table of Contents


Brief History: Human Capital Crises at Ford, 1913-19143

The 5 Dollar-a-Day Wage Rate: Theoretical and Empirical Impact3
A Diminution in Absenteeism and Shirking3
Morale Increase, Turnover Decrease4



One of the major variables that can determine the rate of profit maximization for firms is the efficiency and productivity levels of employees. Ultimately, firms seek to minimize total costs to induce lower expenses and as labour is a vital component in the factor of production, wages are one of the most fundamental expenses incurred by firms. The efficiency wage hypothesis states that “the productivity of workers is affected by the wage rate that they receive” (Sloman 2006, G:5). Essentially the introduction of Henry Ford’s “5 dollar-a-day” employee wage structure evidently proved this theorem correct, with empirical evidence. The idea behind Ford’s supracompetitive (Raff and Summers 1987, s 58) wages must be critically evaluated and analyzed. This essay will briefly describe the history behind the decision making process leading to the 5 dollar-a-day wage rates as well as an analysis on its effects on absenteeism, shirking and employee morale. The scope of this essay will highlight the degree to which efficiency wages were of importance to Ford Motor Company and evaluate the importance of the doubling of wages with theoretical and empirical support. Brief History: Human Capital Crises at Ford, 1913-1914

The necessity for high skilled workers was never a concern for Ford but the degree to which employees valued their jobs was (Raff and Summers 1987, s 65). Workers in the assembly line revealed the monotonous and low skill level required for the production of the T Models (Chandler 1964, p 28). Boyd Fisher (1917) accounts that there were high turnovers as a result of a under par working conditions, “inequities in pay and the monotony of the work. “A Company survey revealed that 7,300 workers left in Match 1913 of which a staggering 71% were accounted for workers who left for 5 days and did not return (Raff and Summers 1987, s 63). Even though employee replacement was easy as a result of no shortages of labour the fact was that costs would be incurred in training new employees. The implication that the general population of workers undervalued their positions disabled Ford to utilize the maximum productivity of the assembly line. Thus the assembly line consisted of low morale employees who practiced shirking (Raff and Summers 1987, s 67). Additionally the dissatisfaction in the workplace was aided by the unpleasant management of men by foremen and superintendents (Meyer 1981, p 100-101). On 5th January 1914 the Ford Motor Company announced that it would more than double the wages of its workers. The 5 Dollar-a-Day Wage Rate: Theoretical and Empirical Impact A Diminution in Absenteeism and Shirking

Efficiency wage theorist’s state that when firms increase their wages above the market clearing point, then the relative productivity and efficiency of employees will increase as a result (Shapiro and Stiglitz 1984, p 433). Henry Ford’s increasing of wages from $2.34 to $5 was, in his eyes a profit-sharing plan rather than wage increases (Raff and Summers 1987, s 68). The increase in wages gave an increased incentive for people to not only want a place on the assembly line but to ensure that they kept it. The increase in wages did attract the labour market to Ford Motor Company yet given the low skilled level required to operate at Ford there was a significance benefit that Ford would yield. The Shapiro-Stiglitz Equilibrium...
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