The High Wage Fairy
Philip Cross, Special to Financial Post
<http://opinion.financialpost.com/author/specialfp/> | Feb 20, 2013 8:40 PM
ET | Last Updated: Feb 20, 2013 8:57 PM ET
Fords productivity leap made his wage hike possible
Fortune magazine recently ran an article based on its book The Greatest
Business Decisions of All Time. Making the cut it is promoted on the
books cover was Henry Fords famous decision to double workers pay to
US$5 a day, ostensibly so workers could now afford the very products they
were producing, in the words of Fortune. Sort of employee pricing, but
done through higher wage scales, not lower prices. The Ford website today
still cultivates this myth, claiming the wage increase helped build the
U.S. middle class.
The idea is regularly floated that firms should pay more to boost purchasing
power and economic growth. Just last week, a union leader in the U.S. retail
industry said: Wal-Mart could provide the nation with a much needed
economic boost by paying higher wages. There are several things wrong with
this simplistic analysis.
Start with the premise that Ford raised wages to increase purchasing power.
As the Fortune article documents, before raising wages, Ford already had
doubled output of the Model T with his innovative use of the moving assembly
line, without adding to employment. The moving assembly line is what Ford
deserves accolades for. To get an idea of how revolutionary it was, Ford
built just over a quarter of a million cars in 1914, as much as the rest of
the industry combined, but with 80% fewer workers. In other words,
productivity already had doubled, allowing Ford to double wages without
increasing labour costs.
And he needed to raise wages. Employee turnover at the Highland Park Model T
assembly plant hit 370% in the year before the wage increase, clearly
symptomatic of a dysfunctional internal labour market. That means Ford
incurred the cost of hiring 52,000 people in 1913 to fill 14,000 jobs. The
real reason Ford hiked wages was to reduce the cost of this turnover, not a
soft-hearted desire to transfer purchasing power from management Scrooges to
the Cratchits of the world.
The plan worked like a charm, as turnover plunged to 16% after wages were
doubled, reducing labour costs despite the wage hike. Saying he did it to
raise purchasing power was just good public relations. Who wants to
advertise that their workplace was so disagreeable they could not keep
workers for more than a few weeks at a time?
The motive never was to subsidize sales of the Model T to his 14,000
workers, a pittance compared with total Model T production of nearly 200,000
in the first year of the new pay scale (and 15 million by the end of its
production in 1927). Ford boosted sales by cutting car prices nearly 50%
between 1912 and 1916 while booking higher profits. It was the radical
innovation of the assembly line that allowed everyone to win: workers
received increased wages, the firm generated higher profits, while consumers
paid lower prices.
Ford is still reaping good publicity from the notion its founder spread joy
and good cheer in the workplace by raising wages. Its website marvels that
newspapers from all the world reported the story as an extraordinary
gesture of goodwill. The universal appeal of this fable, repeated today by
gullible journalists like those at Fortune, is probably because it feeds
everyones fantasy that one day youll show up at work and get that long
overdue raise, without your firm compromising its competitive position.
Hogwash. If most firms doubled their employees wages without an offsetting
increase in productivity, theyd go bankrupt overnight. Moreover, the $5 a
day came with conditions few would accept today. Some of it was a bonus if
workers stayed for six months and met the strictures of the Social
Department and its 50 investigators, including avoiding alcohol and gambling
and taking English lessons.
Over the long haul, Ford may have come to believe too much in his public
personae as the High Wage Fairy. You can connect Fords pronouncements about
the benefits of not making a few slave drivers in our establishment
millionaires with the inflated wages received at the end of the century by
autoworkers and ultimately the bankruptcy of GM and Chrysler (Ford survived
largely due to a timely US$10.1-billion line of credit taken out in 2007).
The video clips of tens of thousands of workers lined up for a few hundred
auto jobs in the mid-1990s were a clear sign that the dysfunctional amount
of labour turnover at Highland Park had come full circle, with extravagant
employee benefits beckoning legions of workers from other sectors. A lower
wage scale for new hires since 2009 marks the beginning of the correction to
this imbalance.
Commentators regularly mix sentimentality with economics when discussing
wages. The point is that the inherent goodness or well-meaning of people in
a particular line of work is irrelevant, as is aggregate purchasing power.
Supply and demand ultimately determine wages.
Financial Post
Philip Cross is research co-ordinator for the Macdonald-Laurier Institute
and the former chief economic analyst at Statistics Canada.
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