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Ford had a Better Idea

Here’s a letter to the Huffington Post:

Robert Reich repeats the urban myth that Henry Ford’s 1914 increase in the daily wage of most of his workers from $2.34 to $5.00 was meant to better enable those workers to buy the Model T cars that they produced (“What Walmart Could Learn from Henry Ford,” Nov. 17).

The fact is that Ford raised pay (and also reduced the work day from nine to eight hours) in order to retain workers.  Before 1914 – and contrary to the prediction of those who insist that employers have monopsony power over non-unionized workers – workers quit their Ford jobs at extraordinarily high rates.  This high rate of worker turnover was costly to Ford.  Ford successfully decreased this turnover by making employment in his factories much more attractive.

That Ford’s motive was not to enable his workers to buy Ford cars can be shown with simple arithmetic.  Here’s Forbes columnist Tim Worstall (making an assumption most favorable to Reich’s case, namely, that every one of Ford’s employees would buy a new Ford car every year): “Say 240 working days in the year and 14,000 workers and we get a rise in the pay bill of  $9 1/4 million over the year.  A Model T cost between $550 and $450 (depends on which year we’re talking about).  14,000 cars sold at that price gives us $7 3/4 million to $6 1/4 million in income to the company.  It should be obvious that paying the workforce an extra $9 million so that they can then buy $7 million’s worth of company production just isn’t a way to increase your profits.  It’s a great way to increase your losses though.”*

In short, Mr. Reich’s history is bunk.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market
Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* Tim Worstall, “The Story of Henry Ford’s $5 a Day Wages: It’s Not What You Think,” Forbes (March 4, 2012).

I thank James Nellis for the pointer to Reich’s essay.