COMMENTARY: Ford’s Visionary Move to Raise Wages Has Lessons Today

It’s been 100 years since automaker Henry Ford announced one of the most famous business decisions of all time, cited to this day as an example of the economic benefits of boosting workers’ wages.

In short, Ford decided to more than double the pay for his assembly-line workers.

The impact of his strategy generally is characterized in terms of benevolent leadership and shrewd salesmanship. Ford employees were suddenly able to afford the vehicles they produced, which expanded the market.

Given the current debate over paying workers a living wage, it’s virtually certain we’ll be hearing more about the bold initiative Ford unveiled Jan. 5, 1914.

But like any other story told and retold over decades, details get muddied. And so Ford’s move to raise wages has taken on a mythological quality that threatens to obscure its underlying principle, which was a pragmatic calculation.

The nation was struggling to dig out of a recession a century ago when Ford declared he was setting aside some of his company’s profits to increase wages from $2.34 a day to $5. He also cut the workday from nine hours to eight and hired a third shift to churn out Model T’s around the clock.

In today’s dollars, the bump would be the equivalent of going from $6.06 an hour to $14.57. Jobs were not year-round, but still, this was huge in 1914.

The announcement instantly made a household name of Ford the man and Ford the brand. Rivals called Ford a fool, a socialist and worse. Others cast him as a man of the people. Thousands of job seekers lined up outside his Michigan plants – so many, in fact, that the company turned hoses on them at one point to get them to disperse.

It set the stage for the Model T to become an automobile the middle class could afford, which, in turn, became a catalyst for profound changes that extended well beyond American business to American life as we became a nation of drivers.

Originally, though, Ford’s concern was about managing his business, and he said in a Chicago Tribune story of the time that he developed his plan through discussions with inventor Thomas Edison about boosting efficiencies.

The idea that sold the public was simpler: He would pay workers enough to turn them into customers, a line of reasoning that became known as Fordism. This idea also tends to get overblown, because it seems unlikely Ford workers in 1914 could suddenly afford to make this purchase.

President Barack Obama has cited Ford’s generous pay on various occasions to bolster a variety of stances, including the value of improving the economy from the bottom up. The president even used it once in 2009 to drive home a point about the importance of allowing unions to organize – amusing, if only because Ford himself was so virulently anti-union.

“The business press says, oh, that (allowing unions to organize is) anti-business, and whenever I hear that I’m always reminded of what Henry Ford said,” Obama said at the event in Southern California almost five years ago.

“He was paying his workers really well. And somebody asked him, they said, ‘Why are you paying your workers so well?’ He said, ‘Well, if I don’t pay them well, they won’t be able to buy a car.’ ”

In his day, Ford preached that underpaid workers were no more likely to be consumers of most goods and services than the unemployed, so it was in the interests of nearly all businesses to pay “the highest wage the employer can steadily” afford.

An employer “has to create customers, and if he is making a commodity, then his own workers are among his best customers,” Ford noted in “The Great Today and Greater Future,” a 1926 collaboration with journalist Samuel Crowther.

“Paying a high wage has the same effect as throwing a stone into a still pond,” they wrote, explaining that “there can be no true prosperity until the worker … can buy what he makes. … If you cut wages, you just cut the number of your own customers. If an employer does not share prosperity with those who make him prosperous, then pretty soon there will be no prosperity to share.”

But don’t get the wrong idea.

If confronted by demands for a living wage or any kind of minimum wage, Ford’s hose might well have come out again.

“There can be no ‘standard wage,’ ” Ford wrote with Crowther. “A wage based on a standard of living is destructive. … Any attempt to fix a ‘living wage’ is an insult to the intelligence of both managers and workers.”

In practice, even the notion that Ford’s boost of his workers’ wages produced an economic tide lifting all boats has to be tempered. There was some benefit, to be sure. But when enterprising merchants raised prices for food and other goods in response to Ford workers’ new spending power, Ford saw it as exploitation and set out to thwart them by setting up his own shops so his workers could save money.

The rhetoric that made Ford a populist hero – and still burnishes a legacy that might otherwise be eclipsed by less admirable traits, actions and beliefs – masked the carmaker’s true top priority in awarding across-the-board raises.

Employee turnover had proved a costly snag in Ford’s efforts to maximize the efficiency of his newly implemented assembly lines, which were based on Chicago’s brutally systematic slaughterhouses. More than doubling pay enabled Ford to recruit and retain the best workers, ensuring greater speed and quality, because it was well beyond what anyone else would pay. Had others matched his pay scale, that advantage would have vanished.

Following the pay increase, Ford claimed the company went from employee turnover of 31.9 percent in 1913 to 1.4 percent in 1915, even as it added a third shift of workers, a feat that at the old churn-rate he calculated would have meant hiring “at the rate of nearly 200,000 men a year – which would be pretty nearly an impossible proposition.”

Paying 20,000 to 30,000 workers enough to buy cars wasn’t going to make or break his business. Boosting production to 8,000 Model T’s a day and cutting the cost of a car from around $850 to $300 would. That’s what the wage increase helped him do.

“By speeding up the line, you get a productivity boost,” said William Holahan, a professor emeritus in economics at the University of Wisconsin-Milwaukee. “There’s a fundamental equation. Cost equals wage divided by productivity. So if you increase productivity, you can reduce costs despite increasing your wages. That’s what he was able to accomplish.

“By 1920, Ford was producing more cars and at a much lower price, and he was able to pass along some of those cost savings to car buyers. The ironic thing is that eventually, because prices came down as a result of this management insight he had, that was what enabled the workers to buy the cars.”

Whatever reasons there might be to consider raising the minimum wage, it’s worth remembering what made Henry Ford’s decision a century ago so successful.

The increased wages were an investment. The increased productivity made it pay off. And the nation got cars.