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Henry Ford more than doubled the average wage of his workers to five dollars a day in 1914 and started selling more cars. This led to the persistent belief that Ford paid higher wages so his workers could buy more Fords.
Despite being transparently silly, this belief continues to resurface as a justification for increasing purchasing power and employment with government policies that reduce production.
Ford was smart enough to know that his workers would not spend their increased wages entirely on Fords. If he had wanted to subsidize his workers' purchases of Model Ts, it would have been much cheaper to give them a discount.
The desire to increase his profits by reducing the cost of producing cars was the real reason Ford raised wages. It worked.
In 1913, Ford had an employee turnover rate of 380%, which required hiring 52,000 workers annually to maintain a work force of 13,600. In addition to the cost of replacing workers, productivity suffered from a 10% absentee rate, and the workers who showed up were inexperienced and commonly shirked as much as they worked.
Higher wages remedied these problems. Anxious prospects lined up in hopes of being hired by Ford, who employed only those whose personal habits indicated they would be dependable workers as determined through investigations, including home visits, by his personnel department. Ford paid for dependability, and he got it.
In 1915, Ford's turnover rate fell to 16% as productivity soared. He reduced the Model T's price by 10% each year from 1914 to 1916, and his annual profit increased to $60 million from $30 million. Ford was quoted as saying that more than doubling wages "was one of the finest cost-cutting moves we ever made."
Ford increased the purchasing power of his workers by paying them more. But far more importantly he increased the general purchasing power by reducing the production cost, lowering the price and increasing the output of a product consumers wanted.
In other words, he increased purchasing power almost entirely by increasing supply, not increasing demand.
Ford's wage increase was remembered during the Great Depression, but not its supply-side lesson. The prevailing view in the 1930s was that increasing wages and prices would increase purchasing power by increasing incomes, and therefore demand.
This view was the justification for polices that raised hourly wages by strengthening labor unions, shortening workweeks and restricting pay cuts, and raised prices by destroying agricultural products and reducing competition.
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Posted By: investorLoonie1(785) on 9/20/2010 | 9:41 PM ET
Yes the right wing ruling elite want the rest of this nation to work for peanuts while they rob steal and pillage whatever they can under the false pretense of being patriotic and good God Fearin Christians. IBD will further this agenda at all times as long at is paid to do so by this same aristocracy.
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