The Ford Motor Company Wage Increase Of 1914 And The Theory Of Incentives And Efficiency Wages

1252 words - 6 pages

‘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 ...view middle of the document...

The work required was sufficiently menial and easy to learn that selection was simple and low-cost and turnover was also low-cost. Following this reasoning, basic microeconomics would point to Ford’s inability to attract enough workers of the desired quality as the reason for its decision to raise wages. This inability could arise either from low wages for the desired level of ability, or undesirable job qualities. The latter is more likely in this case, since the level of ability required was among the lowest of any firm. However, Ford was not finding difficulty in attracting new workers, but rather in retaining them.
An alternative explanation based on efficiency wage theory addresses this fact: Ford may have raised wages in order to increase productivity and reduce absenteeism, or to address a morale problem. Incentive theory explains how these objectives would be met by increasing wages. If workers have a choice between committing to being productive or shirking, paying a market competitive wage may lead to shirking in a full employment economy because if the worker is found to be shirking and loses their job, they will simply find a new job at the same rate of pay. There is no obvious financial incentive to be productive. This explanation is limited, as a number of other factors influence workers’ incentives to perform well or shirk, such as opportunities for career development, intrinsic motivation and the work environment. Taking into account that previous to the five-dollar day measure at Ford Motor, both turnover and absenteeism were exceptionally high, it may be the case that workers were not in fact receiving high enough incentives to continue in their jobs, given that they face a leisure-work trade-off. The opportunity cost of leisure may have been too low to prevent workers from being absent or abandoning their jobs. Even if this does not fully explain their decisions, it is a determining factor.
Yet given that it was relatively cheap to replace labour and that there was no risk of shortage in the particularly skills required for the jobs, it seems unlikely that Ford would more than double its wages simply to keep workers from choosing too much leisure time over work. It is more likely that the company decided to pay efficiency wages. The theory of efficiency wages says that paying high wages (above the competitive market rate) increases worker productivity. Workers have a higher incentive to remain in their current job and to be productive, because if caught shirking the loss is high – they will not be able to find another job that pays such a high wage. Additionally, efficiency wages lead to competition among workers (and job seekers), not only those who were already in the job market, but also new incumbents...

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