There is a popular meme that runs throughout American pop culture, one that I heard in my AP history course during high school. The teacher recounted that when Henry Ford doubled his workers’ wages, his reasoning was that “then they would be able to buy more products and he would be richer.” While this is about the most inane version of this meme, other ones still arise. That “he wanted his workers to be able to afford the cars they make” seems to be the more popular version. This sentiment seems to have been popularized by Ida Tarbell, the muckraking journalist popularly known for her attacks on Standard Oil. Not quite the fountain of objectivity.
I was unable to track down any quote by Ford on this matter, but even if he did make such statement, one has to remember that popular perception might make him choose his words carefully. No one would expect Wal-Mart to say that the reason they gave out free supplies during Katrina was to boost their image.
The reality is that before the wage increase, Henry Ford commissioned manager John R Lee to study the labor turnover rate at his plants. The results showed a few things:
1. The hours were too long.
2. The wages too low.
3. Bad housing conditions.
4. Unsanitary and undesirable shop conditions.
5. Poor supervision
(John Cunningham Wood. Michael C. Wood. Henry Ford: critical evaluations in business and management. 2003. p. 260)
Nearly doubling worker wages quickly decreased the turnover rate from 370 percent to 20 percent and productivity rose between 40 and 70 percent. (Did Henry Ford Mean to Pay Efficiency Wages, Jason E Taylor. 2003.)
This was not due to some magical “when you pay people more they can afford more and the economy is better”. (See the Broken Window Fallacy) The real reason is because people began to value their jobs. They worked harder because they would lose more by being fired and would gain more working for Ford than in other employments. Workers began lining up for jobs. Henry Ford was able to recruit the best laborers.
Wages have long been underestimated by those who think that employers in the free market can oppress their workers. There is adequate evidence that even slavery was falling out of fashion due this wage incentive effect. When competition is allowed, labor flows to its most effective use at its natural market price. When competition is not allowed, such as the government mandating minimum prices, the results are unemployment and under production.