Henry Ford's Efficiency Wages
Economics of Management Strategy | January 1
2011
| 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
Introduction 3 Brief History: Human Capital Crises at Ford, 1913-1914 3 The 5 Dollar-a-Day Wage Rate: Theoretical and Empirical Impact 3 A Diminution in Absenteeism and Shirking 3 Morale Increase, Turnover Decrease 4 Conclusion 4 Bibliography 5
Introduction
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
2011
| 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
Introduction 3 Brief History: Human Capital Crises at Ford, 1913-1914 3 The 5 Dollar-a-Day Wage Rate: Theoretical and Empirical Impact 3 A Diminution in Absenteeism and Shirking 3 Morale Increase, Turnover Decrease 4 Conclusion 4 Bibliography 5
Introduction
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
Bibliography: Abell, O.J. “The Ford’s Plan For Employees’ Betterment.” Iron Age (January 8, 1914), p 307-8 Akerlof, G.A Chandler, A.D., Jr., ed giant Enterprise: Ford, General Motors, and the Automobile Industry. New York: Harcourt, brace, and World, 1964. Fisher, B. “Methods of Reducing the Labor Turnover.” Bulletin of the Bureau of Labor Statistics, no. 196 (1917), p 15-24. Ford, H. My Life and Work. Garden City, N.Y.: Doubleday, page, 1922. “Ford Gives Reasons for Profit-Sharing.” New York Times (January 9, 1914). Meyer, S. The Five Dollar Day: Labor Management and Social Control in the Ford Motor Company, 1908-1921. Albany: State university of New York Press, 1981. Nevins, A URL <http://www.columbia.edu/~mw2230/EfficiencyWages.pdf> (Accessed: 13/12/2011). Carl Shapiro and Joseph E. Stiglitz. 1998. Equilibrium Unemployment as a Worker Discipline Device. [ONLINE] Available at:http://econ161.berkeley.edu/teaching_folder/Econ_202b/readberk/Shapiro_Stiglitz.pdf. [Accessed 10 December 11].