1. No category

NORC at the University of Chicago
The University of Chicago
Did Henry Ford Pay Efficiency Wages?
Author(s): Daniel M. G. Raff and Lawrence H. Summers
Source: Journal of Labor Economics, Vol. 5, No. 4, Part 2: The New Economics of Personnel
(Oct., 1987), pp. S57-S86
Published by: The University of Chicago Press on behalf of the Society of Labor Economists and
the NORC at the University of Chicago
Stable URL: http://www.jstor.org/stable/2534911
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Did HenryFord Pay
Efficiency
Wages?
Daniel M. G. Raff,Harvard University,
GraduateSchoolofBusiness
Administration
LawrenceH. Summers,Harvard University
and
NationalBureauofEconomicResearch
We examine Henry Ford's introductionof the five-dollarday in
1914 in an effort
to evaluatetherelevanceof efficiency
wage theories
of wage and employmentdetermination.
We concludethattheFord
experiencestronglysupportsthe relevanceof thesetheories.Ford's
decision to increasewages dramaticallyis most plausiblythe consequence of labor problemsof the kind efficiency
wage theorists
stress.The structureof the five-dollarday programis consistent
with the predictionsof efficiencywage theories.There is vivid
evidence that the introductionof the five-dollarday resultedin
substantialqueues for Ford jobs. Significantincreases in Ford
productivity
and profitsaccompaniedthe new regime.
Economistsunderstandwell how a perfectlycompetitivelabor market
withoutinformationproblemswould function.Flexible wages would
a drasticrevisionof an earlierpaperby the second
This paperrepresents
authorhavingthesametitle.We aregrateful
to AnnePiehlforherverycapable
research
assistance
and to David Crippen,curatorof automobile
at the
history
Thisresearch
wassupported
FordArchives,
Dearborn,
Michigan.
bytheNational
Thedataunderlying
ScienceFoundation
andtheSloanFoundation.
theregressions
areavailableon request.
[JournalofLaborEconomics,1987,vol. 5, no. 4, pt. 2]
? 1987 by The University
of Chicago. All rightsreserved.
0734-306X/87/0504-0012$01.50
S57
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S58
RaftandSummers
The wages
unemployment.
clearlabormarketsand eliminateinvoluntary
would be equalized and would not
of workersof a givenproductivity
dependon age, race,sex, or locationof employment.Wage differentials
for workers with the same productivitycould not persist because
employerswould hire only the low-wage workers,creatingan excess
does not seem to
supplyof high-wageworkers.Yet wage determination
work this way in practice. Involuntaryunemploymentis observed
frequently,and it has proved extremelydifficultto account for the
wage differextentof age-, race-,sex-, firmsize-, and industry-related
in productivity
or to relativedisamenities
entialsby pointingto differences
in the work itself.This is not just an artifactof union activity;even in
unemployment
labormarketsin whichlabor is unorganized,involuntary
and wage differentials
appear pervasive.
wage theories
These realitieshave led to thedevelopmentof efficiency
along lines recentlysurveyedby Stiglitz(1984) and Katz (1986). These
theorieshave in common the implicationthat over some range a firm
can increaseits profitsby raisingthe wage it pays its workersto some
one. A varietyof mechanisms,turning
level above the market-clearing
on the role wage increases might play in elicitingeffort,reducing
turnover,attractingbetterworkers,and improvingmorale,have been
suggestedto explain why profitsmightbe an increasingfunctionof
wages. Some such mechanism must be central to any neoclassical
explanationof these facts.So long as we assume that firmsmaximize
profits,the only way to explain why firmsdo not lower theirwages in
the face of excess supply of labor is to postulatethat it would lower
theirprofitsto do so.
This tautologicalargumentin supportof efficiency
wage theoriesis
in severalrespects.First,it restson the demonnot especiallysatisfying
in
thatcannotbe explainedby differences
strationof wage differentials
cannot be observeddirectly,such
ability.Since individualproductivity
an inferenceis inherently
problematic.Second,it providesno indication
of whichefficiency
wage theoryexplainsthepaymentof supracompetitive
wages and thereforegives no explanationof why firmsfail to lower
their wages in the face of an excess supply of labor.' Third, as an
argumentby elimination,it does not provide any direct support for
efficiency
wage theoriesas opposed to some as yetunspecifiedalternative
line of explanationforwage differentials.
For all these reasons, one would like to see more direct tests of
particularefficiencywage theoriesor, more generally,of alternative
Such testsare difficult
to construct.
explanationsforwage differentials.
The very impedimentsto evaluatingworkers'ability,motivation,and
I Throughout
thispaper,we will use thephrases"supracompetitive
wages"
and"wagesabovethemarket-clearing
level"interchangeably.
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Did HenryFordPayEfficiency
Wages?
S59
stabilitythat might lead employers to pay efficiencywages make
If theinformation
conventional
testingofefficiency
wage theoriesdifficult.
needed to testthesetheorieswere available,theremightbe no need to
pay efficiency
wages. Econometrictestsof efficiency
wage theoriesalso
face the problemthat variationsin wages across firmsor workersare
unlikelyto be exogenous, complicatingconsiderablythe problem of
It is thus not surprisingthat fullysatisfactory
identification.
tests of
efficiency
wage models have yet to be undertaken.2
This paper considersa famoushistoricalepisode withobvious bearing
on the relevanceof efficiency
wage theories.In January1914, Henry
minimumwage in his automobile
Ford instituteda five-dollar-a-day
factory.This doubled the pay of most of his workers.Ford himself,in
a subsequentcommentaryon this epochal event,observed,"There was
. .. no charityin any way involved. . . . We wanted to pay these
wages so thatthe businesswould be on a lastingfoundation.We were
buildingfor the future.A low wage businessis always insecure....
The paymentof fivedollarsa day foran eighthour day was one of the
finestcost cuttingmoves we evermade" (Ford 1922,pp. 126, 127, 147).
Ford (or his ghostwriter)seems to be suggestinghere that efficiency
wage concernsboth motivatedthe five-dollarday and werevalidatedby
its aftermath.
Given the generaldifficulties
involvedin testingthesetheorieseconoa qualitativeapproachto a specific,narrowlydefinedepisode
metrically,
seemsto hold some promise.By focusingon a singleeventand a single
company,we are able to avoid the blurringof importantdistinctions
within firmsand industriesthat afflictsother recent studies and to
examinecomplexitiesthatare inevitablyobscuredin situationsin which
only summarystatisticsare available.We are greatlyaided in thisby the
factthatan extraordinary
amountis known (or inferablefrommaterials
in archives)about productionin thisparticularfirmand about not only
theactionsof the companyand theirconsequencesbut also the decision
makers'motivations.Moreover,the Ford episode involvesa spectacular
rise in workers'income. If evidence of productivity-enhancing
effects
cannot be found in this setting,with the take-homepay more than
doubled,it is implausiblethatsuch effectscould representan important
aspect of the much smallerdifferentials
generallyobservedin contemporarylabor markets.
We beginby describingthe developmentsat Ford and elsewherethat
precededthe introductionof the five-dollarday. Our focus here is on
whetherthe dramaticwage increaseofferedby Ford mighthave been
motivatedby a desire to improveprofitsthroughinfluencingworker
2 Two recentbut not entirely
satisfactory
attemptsare Dickens and Katz (1986)
and Kruegerand Summers(1986).
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S60
RaftandSummers
behavioralong the lines suggestedby some efficiencywage theories.
Next we describethe five-dollarday program payoutsand associated
rulesand institutions in some detail.Here thegoal is to drawinferences
of the programput in place. Finally,
about the intentfromthe structure
we turn to an evaluationof the actual effectsof the five-dollarday,
efficiency
concentrating
on thetwo questionssuggestedby contemporary
wage theories.First,did theprogramin factgeneratequeues of workers?
was Ford simplypaying the wage necessaryto attract
(Alternatively,
labor of the desiredqualityto his plant?)Second, did the wage increase
benefitsthroughany of the channelssuggestedby
conferproductivity
efficiency
wage theorists-increasedworkerdiscipline,betterselection
or improvedworkermorale?
of workers,reducedturnover,
Our general conclusion is that the Ford experiencesupports the
wage theories.Ford's decision to increasewages
relevanceof efficiency
dramaticallyis most plausiblyportrayedas the consequence of labor
The structure
wage theorists.
problemsof thekind stressedby efficiency
of the five-dollarday programis consistentwith the predictionsof
efficiency
wage theories.There is vividevidencethatthe five-dollarday
increases
resultedin substantialqueues forFord jobs. Finally,significant
in productivity
and profitsat Ford accompaniedthe introduction
of the
five-dollarday.
While theFord experienceis generallyconsistentwithefficiency
wage
improvements
theories,it is not easy to explain the large productivity
thatoccurredin the Ford plantwhollyin termsof the mechanismsthat
have been stressedin the recentefficiency
wage literature.Jobs were
menial that it is unlikelythathigh turnoverwas extremely
sufficiently
costlyor thatworkerselectioneffectswere important.While improved
theincreases
productivity
was associatedwithnotableincreasesin effort,
in effortprobablywere easilymonitored,contraryto the implicationof
of perfectmonitoring.Ford's wagetheoriesbased on the difficulty
settingpolicies probably involved a substantialcomponent of rent
sharing-and at thatrentsharingin a contextin which historyand the
beliefsof theemployedworkersmattered.
To explaintheFord experience
fully,richertheoriesthattreatthe detailsof the productiontechnology
in more detail and assign a more active role to incumbentworkersin
thewage-setting
processappear to be required.Such ideas are developed
and exploredin Raff(1986), which drawson extensivearchivalresearch
to subjectsuch an account,along withthoseconsideredhere,to detailed
analysis.
This paper is organizedas follows.SectionI brieflydescribessome of
of the five-dollar
the eventsleadingup to the introduction
day and puts
themin the contextof efficiency
wage theory.Section II describesthe
measureitselfin a similarway. SectionIII examinestheextentto which
the wage proved to exceed the equilibriumwage needed to attracta
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Did HenryFord Pay Efficiency
Wages?
S61
sufficient
supply of labor to the Ford plant. Section IV examinesthe
effectof the five-dollarday on profitsand productivity.Section V
concludes the paper by discussingthe implicationsof the resultsfor
efficiency
wage theoriesand more generallyfor the economic analysis
of labor markets.
I. The Period Preceding the Five-Dollar Day
This sectiondescribesthe eventsprecedingFord's introduction
of the
five-dollarday in January1914. It draws heavily,as all subsequent
treatments
must,on Nevins's authorizedcompanyhistory,Ford (1954),
and on Meyer'scarefulif less wide rangingstudy,The Five Dollar Day
(1981). But it puts the basic material,and the gleaningsof our own
research,in a verydifferent
light,forneitherNevins nor Meyerwrites
with an economist'sperspective.Nevins portraysFord as idealistically
to do the rightthingforhis workers.Meyersees mattersin
attempting
termsof a strugglefor control of the workingenvironmentbetween
Ford and his workers.The question of whetherFord was tryingto
maximizesomethingotherthanprofitsis skirtedby both authors.More
generally,these authors like the other historiansand more popular
writerswho have writtenabout thefive-dollar
day are moreconcerned
with describingwhat happened than with analyzingin any systematic
contextthe reasonsbehindthe event.
GeneralBackground
The Ford Motor Company was foundedin 1903 and remainedquite
small for the next 5 years. By 1908 it had only 450 employeesand
produced just 10,607 automobiles.At this point Ford's share of the
automobilemarketwas 9.8%. A largefraction
ofthecompany'semployees
were skilled craftsmen one descriptionof the early Ford factorywas
of "a congeriesof craftsmen'sshops ratherthan an integratedplant"
(quoted in Meyer 1981,p. 15). By 1910 roughlytwo-thirdsof the work
forcewere eitherforemenor mechanicsratedeither"highlyskilled" or
"skilled" (Meyer 1981, p. 48). Such workersexercised,as theywould
have done most everywherein Americanindustryof the day, "broad
discretionin the directionof theirown work and thatof theirhelpers."
The reasonsFord employmenthad thischaracterare easy to identify.
Ford was not manufacturing,
but merelyassembling,cars. The parts
were produced by outside machineshops and were not made to any
particularlyhigh tolerances.A great deal of shaping and fittingwas
required to get them togetherproperly.Thus the judgmentof the
craftsman
had to be reliedon.
metalworking
The period 1908-14 saw drasticchangesin the methodand scale of
productionat Ford. Early in 1908 Ford settledon the design of the
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S62
RaffandSummers
Model T and the idea of producingnothingelse. Ford's philosophywas
clear. As he subsequentlystated:"The way to make automobilesis to
make one automobilelike anotherautomobile,to make themall alike,
to make themcome throughthe factoryjust alike, just like one pin is
like anotherpin when it comes fromthe pin factoryand one matchis
like anothermatchwhen it comes fromthe matchfactory"(Chandler
1964,p. 28).
Ford wantedto do thisby havingthe partsmade to sufficiently
high
tolerancesthatskilledfitting
would no longerbe required.The production
process was also simplifiedby redesigningthe workshopto minimize
unnecessarymovementof workmenand parts.In general,thework was
broughtto the workers,and theworkers'taskscame to involveless and
less judgmentand discretion.All thisenabledproductionon an unprecedentedscale.3By 1913, just beforethe introductionof the five-dollar
day, the numberof workershad increasedto 14,000.Output had risen
twenty-five-fold
over the preceding5 years to 248,307 cars. One sees
in the vivid
somethingof the impressionthis made on contemporaries
descriptionof one journalist:"One day's shipmentalone leaving the
factorya half a mile apart, would reach fromDetroit to New York
City" (Colvin 1913, p. 758). That day's shipmentwas many timesthe
daily, and in some cases even monthly,output of any of Ford's
competitors.
They stillproducedcars in the old-fashionedway.
These changesin productionmethods,capped by the introduction
of
the assemblyline,were associatedwith a major changein the character
of the Ford work force.By 1914 three-quarters
of it were foreignborn,
and more than half were recentimmigrantsfromthe unindustrialized
regionsof southernand easternEurope. Thereis a greatdeal of evidence
thatthe jobs theyfilledcould be learnedextremely
easily.Meyerquotes
reportssuggestingthatjobs could swiftlybe learnedby a man in offthe
street.The followingreportof a Yale engineeringstudentwho worked
forFord duringa summeris typical:4
'The firstmovingassemblylines were installedin April 1913,and that
production
technology
firstcameto finalchassisassemblyin October.These
werethedramatic
events.Butwe shouldbe clear,as manywho writeon this
workforcewas
subjectarenot,thatas oflate1913mostoftheFordproduction
line.Nonetheless,
theinfluence
oftheseroutinizing
notworking
on an assembly
partsandsubassemblies
methods
waspervasive
bythen.Demandsforcomponent
weremoreand moredrivenby the demandsof the line. Machiningtasks
rather
weremoreand morebeingcarriedout withsingle-purpose
themselves
less and less scope for metalworking
skills
than general-purpose
tools, offering
broadly,
and formachiniststo controltheirtime.(It was thisdevelopment--more
the so-called American System of production-and not assembly lines in
themselvesthatmade productionon a verylarge scale possible [see Hounshell
1984].)
4The period,we should note,was a laterone, but the technologyand shopfloormethodswere essentiallyunchanged.
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Did HenryFordPayEfficiency
Wages?
S63
Division of labor has been carried on to such a point that an
overwhelmingmajorityof the jobs consist of a very few simple
operations.In most cases a complete masteryof the movements
does not take more than fromfiveto ten minutes.All the training
that a man receivesin connectionwith his job consistsof one or
two demonstrations
by the foremanor the workmanwho has been
doing thatjob. Afterthesedemonstrations
he is considereda fully
qualified "production man." All that he has to do now is to
automatize these few operations so that speed may rapidly be
increased.[Meyer1981,p. 41]
The dramaticevolutionin productiontechnologychangedthe lifeof
As taskswere dividedmoreand more
the workingman fundamentally.
finelyand becamemoreand moreroutinized,workbecamemoremenial.
At the same time,the need forworkersto be in lockstepto make the
assemblyline work smoothlyincreasedthe pressureon workers.The
issue hereis centralizedsettingof thepace of work and, moregenerally,
centralizedcontrolof effortrequirements.
Single-purposemachinetools
and the movingassemblyline both offeredmeans for the companyto
utilize fullythe labor time it purchasedin the same way its mechanics
and repairshops allowed it to utilize fullyits machines.5Meyerquotes
anotherYale studenton the immediateconsequences:"You've got to
work like hell in Ford's. From the time you become a numberin the
morninguntil the bell ringsfor quittingtime you have to keep at it.
You can't let up. You've got to get out the productionand if you can't
get it out, you get out" (Meyer 1981, p. 44). The effectof all this was
well summedup by the contemporary
autoworkerlaborerwho said, "If
I keep puttingon Nut No. 86 for about 86 more days, I will be Nut
No. 86 in the Pontiacbughouse"(Meyer 1981,p. 40).
While anecdotal evidence of worker dissatisfactioncan be found
at Ford took visible form.In
almost anywhere,workerdissatisfaction
1913,annual turnoverat theFord plantreached370%. Ford had to hire
50,448 men during the course of the year in order to maintainthe
averagelabor forceat 13,623.6A companysurveyrevealedthatslightly
more than 7,300 workersleftthe company in March 1913. Of these,
and 71% were so-called
about 18% were discharged,11% quit formally,
5-day men who had missed 5 work days in a row withoutexcuse and
so weresimplydeemedto have quit. The 370% was exceptionaleven by
the standardsof the fluidDetroitlabor market,in which turnoverrates
5Fordhimself
had longrailedagainsttheproblemof soldiering,
i.e.,output
restriction,
whichhe labeledas "thesourceofmorethanhalfthetroublein the
world today" (Meyer 1981, p. 88). Commons (1923, p. 365) describedthe labor
marketbehaviorof such workersvividlywhen he wrote,"They are conducting
a continuousunorganizedstrike."
6The figurescome fromSlichter(1921, p. 244). Other sources give slightly
effect.
different
numbers,but to no different
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S64
RaftandSummers
of 200% were quite common (Slichter1921,pp. 33-34). Contemporary
expertson the problemof high turnover,notablyBoyd Fisher (1917),
regardedhigh turnoveras being the resultof a combinationof factors,
including the arbitrarinessof some foremen,inequities in pay, and
inadequaciesin plantconditions.Some observersalso blamedtheproblem
on the monotonyof workers'jobs.
At the same time thatturnoverbecame so alarming,Ford also faced
a 10% daily
an epidemicof absenteeism.In 1913,the companysuffered
absenteeismrate. (This meantthaton the averageday it was necessary
to make use of 1,300or 1,400replacementworkers,each of whom was
inexperiencedat the specifictask he was to perform.)SumnerSlichter
(1919, pp. 826-27) took theview thattheworkersimplyneeded a break
fromthe rigorsand routinesof mechanizedfactorylife.Withoutformal
thevoluntary
vacation.
layoffwas theworking-class
vacations,he thought,
Despite all this the company was flush.Ford's marketniche had
inexpensive
emergedas a nearmonopolyin theproductionoftherelatively
cars sellingfor$600 or less: by 1913, the Model T had a 96% market
share. During the 5 years precedingMarch 1, 1913, profitsaveraged
118% of tangibleassets.During 1912 theseprofitshad exceeded 132%.
It is indicativeof the demand forFord cars thatthe companywas able
to price in such a way thatit earnedprofitsequal to 3l1% of sales. The
reflectedin partthe popularityof Ford cars and in partthe
profitability
of Ford productiontechniques.
efficiency
MotivationsforMaking a Change in Compensation
The motivationsfor the decision to introducethe five-dollarday
to pin down. Ford's ghostwriters
package in January1914 are difficult
But enoughis known
are certainlyinconsistent
regardinghis intentions.7
of the historicalrecordto permitsome inferencesabout Ford's intent.
The simplestexplanationsuggestedby economic theoryfor why a
firmwould raise its wages sharplyinvolvesthe possibilitythat it was
unable to attracta sufficient
quantityof labor of the desired quality.
Inabilityto attractworkerscould resultfromeitherwages thatwere too
low or uncompensatedunpleasantaspectsof jobs.
in retainingand elicitingeffort
While Ford had substantialdifficulty
fromworkers,it is veryunlikelythatFord raisedwages in January1914
because of difficulties
gettingenough workersto accept Ford jobs. By
1913 the long employmentline in frontof the Ford plant had become,
in the phraseof one contemporary
observer,"one of sightsto whet the
7Compare, "If it is rightforthe managerof a businessto tryto make it pay
a largerdividend,it is quite as rightthat he should tryto make it pay higher
wages. . . . Such are the fundamentaltruthsof wages. They are partnership
distributions,"
with,"I am not a reformer"
(Ford 1922,pp. 121, 3).
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Did HenryFordPayEfficiency
Wages?
S65
curiosityof rubber neck tourists" (Porter 1917, p. 263). There is
essentiallyno evidencethatthecompanyhad any troublewithvacancies
at the wages it was offering.Ford's labor problems in this sense
transcendeddemandand supply.And beginningin the summerof 1913,
theavailablesupplyof labormusthaveincreasedas thenationaleconomy
in generaland that of the Detroit hinterlandsin particularsuffereda
downturn.Table 1 showsthatthenumberofpersonsreceiving
significant
special unemploymentreliefin the countyincludingDetroit increased
by about two-thirdsbetweenthe period July1912-June1913 and the
analogous period the followingyear. It is thus not veryplausible that
labor shortages,to whateverextentthey existed,were expected to be
particularly
acute duringthe winterof 1914.
Nor is it plausiblethatFord chose to raise wages in orderto attract
more highlyqualifiedworkers.The whole of the technicalchange at
Ford duringthis period was movingtoward less skilled work. Other
thingsbeing equal, this would lead to a predictionthat wages would
fall,not rise.
Rulingout thesestandardcompetitive
explanationsfora wage increase,
we are left with two other possible explanations.Ford may have
increased wages in an effortto raise productivityby reducing the
turnoverand absenteeismor by gettingdirectlyat some moraleproblem.
These are the canonicalefficiency
wage explanationsforthe decisionto
he mayhave doubledwages forsome personal
raisewages.Alternatively,
reason-to be magnanimousor perhaps to become famous.There is
evidencein the eventsleadingup to the five-dollarday to supportand
to refuteboth interpretations.
It is clear that,for some time prior to the introductionof the fivedollar day in 1914, Ford managementhad been concernedabout labor
and itsconsequencesforproductivity.
motivation
Originally,thecompany
had had no particularpolicy or strategyfor managinglabor. JohnR.
Table 1
Poor Relief in Wayne County,
Michigan, 1910-15
Period
July1910-June1911
July1911-June1912
July1912-June1913
July1913-June1914
July1914-June1915
July1915-June1916
PersonsGranted
Relief
5,724
5,768
5,266
8,932*
19,085t
9,047
SOURCES.-Garrity (1940, tabularapps.).
* Nearlya 50% increase.
t The recessionin fullforce.
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S66
RaftandSummers
Lee, the firstFord personnelmanager,laterdescribedthe evolutionof
thisstateof affairs:"We began to realizesomethingof the relativevalue
of men mechanismand material,so to speak,and we confessthatup to
this time we believed that mechanismand materialwere of larger
importanceand thatsomehow or otherthe humanelementof our men
were takencare of automaticallyand needed littleor no consideration"
(Lee 1916, p. 299). Lee went on to recountan incidentin which the
outputof a drophammeroperatorfelloffabruptly.Investigation
revealed
thathis wifewas veryill and thathe was preoccupiedwithfearsforher
and worriesabout payingforthe medicalexpensesbeing incurred.The
companypaid offthe debts. The operator'sproductivity
jumped back
up again.
In the summerof 1913 Ford managementasked Lee to undertakea
studyof the conditionof labor at Ford,includingtheworryingturnover
rates.Lee conductedan investigation,
comparedwhat he had foundto
what was to be seen in othercontemporary
plants,and issued a report.
In it he said that the chiefcauses of dissatisfaction
and unrestamong
the employeeswere as follows(Meyer 1981,pp. 100-101):
1. Too long hours. A man whose day is too long and whose
work is exhaustingwill naturallybe lookingforanotherjob.
2. Low wages. A man who feelsthathe is being underpaidwill
always be lookingfora changein occupation.
3. Bad housing conditions,wrong home influences,domestic
trouble,etc.
4. Unsanitaryand otherundesirableshop conditions.
5. Last and perhapsthe most importantcause of dissatisfaction
is the unintelligent
handlingof the men on the partof the foremen
and superintendents.
These points speak to the questionof what lay behindthe turnover.
They are equally consistentwith the view thatturnoverwas a problem
in itselfand withtheview thatthedissatisfaction
theturnover
motivating
was what was to be feared.Workerswho mayin the end leave but who
for the momentare still on the shop floorare in a position to slow
down or otherwiseinterfere
with operations.Smooth coordinationwas
becoming a more and more importantcomponentof the company's
valueadded,and collectiveacquiescencein shop-floor
orderand discipline
was crucialin this.
Following Lee's study,on October 1, 1913 3 monthsprior to the
introductionof the five-dollarday the company instituteda new
personnelprogramwith several elementsdesigned to combat worker
dissatisfaction.
The firstwas an across-the-board
wage increaseof 15%.
The secondwas a majoreffort
to rationalizethepay structure.
Previously,
therehad been a wide varietyof pay scales and pay rates. Individual
foremenhad had greatdiscretionand essentiallyno supervisionin these
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Wages?
Did HenryFordPayEfficiency
S67
matters.Lee introduceda simplerand less easily abused "skill-wages"
classificationprogramin which workers'pay was determinedon the
and seniority.
basis of a relativelysimpleformulainvolvingperformance
Lee
arbitrarily
ability
to
discharge
workers
Third,
eliminatedforemen's
and
hiring
firing
in
the
Employment
by centralizingauthorityover
Department.
Evaluating this program is important in determining the motivation
for the five-dollarday. To the extentthat the reformsintroducedin
October were successfulin solving the labor problems experienced
withinthe Ford plant,it would be difficult
to attributethe introduction
if
Alternatively,
of the five-dollarday to efficiency
wage considerations.
the October programamelioratedbut did not solve the labor problems
at Ford,it is reasonableto see the five-dollar
day as just thesecond stage
in a program(or the second battle in a campaign)directedat raising
productivity.The limited informationthat is available supports the
Lee, in describingthe introductionof the fivesecond interpretation.
dollar day,treatsthe October and Januaryreformsas aspectsof a single
program(Lee 1916,p. 301). Meyer(1981, p. 108) concurs,describingthe
programas "supplementingand extending"the earlierFord reforms.
Strongevidence supportingthis view is the observationthat turnover
declinedin October when the reformswere introducedbut appears to
have risen sharplyagain in November and December (see Hounshell
1984,p. 258).8
An incidentrecountedby Nevins suggeststhatefficiency
wage considerationsmay have played quite a conscious role in Ford's decision to
raise wages: it establishesthatFord had had the possibilityof a wagelink quite explicitlyexplainedto him. A close professional
productivity
associate and personal friendof Ford's, PercivalPerry,opened Ford's
originalBritishplant in Manchester.At first,Perrypaid the thengoing
wage of about 1.5 pounds a week. But he then discoveredthata wage
of 3 pounds was required for a worker and his familyto subsist
adequately.He thereuponraised wages for all workersto 3 pounds a
benefits.When Ford visited
week and reaped substantialproductivity
we have reviewedon the
8All the availablesecondarysourceliterature
introductionof the five-dollarday, except Nevins (1954, p. 537), draws the
thedecisioninsteadto "practical
conclusionreachedin thetext.Nevinsattributes
engineeringwould have
idealism,"claimingthat all the demands of efficiency
been met by Lee's October reforms.He draws his views (often,indeed, his
sentences)in that passage fromHeliker (n.d.) (Heliker was Nevin's research
assistant).NeitherNevins nor Helikeraddresses,or even alludesto, any evidence
to avoid theimpression
in Novemberand December.It is difficult
aboutturnover
thattheysaw the monthlyturnoverfigurefor October, made up theirminds,
and gave the matterno furtherthought.But thereare a numberof reasonsfor
believingthatthisis too simplean analysisand thatthe reportscited above are
what one oughtto have expected(see Raff1986,sec. 8).
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S68
Raffand Summers
Englandin 1912,Perryis known to have explainedhis "high wages and
straightwages" plan in some detail(Meyer 1981,p. 120).
We have been arguing,as we shall throughoutthispaper,as if it were
certainthat Ford was coping with whateverproblemshe saw in an
effortto maximizeprofits.But it is possible thatFord raisedwages not
in response to labor market problems but out of a desire to be
magnanimousor to attractattentionto himself.This possibilitymustbe
takenseriously.HenryFord owned 58.5% of theFord Motor Company.
There is littlereasonto expectthathe would maximizecompanyprofits
ratherthanhis own utility.Ford spoke, at least in 1914,frequently
and
somewhatmysticallyabout the importanceof sharingwiththe working
man. Furthermore,
the introductionof the five-dollarday broughthim
worldwidefame and reknown.9There is no particularreason to think
thatFord did not enjoy thisacclaim.
On the otherhand, he oftenseemed embarrassedthatanyone might
thinkhim anythingother than a hardheadedbusinessman."Mr. Ford
laid emphasis," the New York Times reportedof an informalpress
conferencehe gave at the New York Auto Show shortlyafterthe
announcement,'on the factthathe did not considerhis profit-sharing
plan as a work of philanthropy"("Ford Gives Reasons for Profit
Sharing"1914).The announcement
itself,
thoughproudand self-important
in tone (see below), was hardlypublicizedat all. Ford and his business
manager,Couzens (also presentat the announcement),knew verywell
thatReutersand the nationalwire serviceshad residentcorrespondents
in Detroit.SeveralEasternnewspapershad stringers.
Representatives
of
auto and manufacturing
trade journals were close at hand. Yet only
reporters
fromtheDetroit Free Press,Journal,and News were summoned
to hear the greatnews (Lewis 1974,p. 69).
While the desireforpublicityor an altruisticimpulsemay have had
somethingto do withFord's decision,eitheror even both seem unlikely
to representthe whole story.The five-dollarday was projected to
representa $10 millionincreasein thecompany's1914 costs-an amount
totalingabout half the projectedannual profits.It strainscredulityto
suggestthatan expenditureof thismagnitudecould be explainedwholly
withoutrecourseto tangiblegains Ford mighthave expectedto derive.
and more tellingly,thereis no evidence of any serious
Furthermore,
objectionfromany of the minorityshareholders.This group certainly
included men who were willing to go to a law court if necessaryto
protecttheirminorityinterestsagainstwhat theysaw as Ford's unreaIn all likelihood,then,it seemssafeto place significant
sonablecaprice.10
9 In 7 days,e.g., the New York pressdevotedmore than 50 columns,mostly
on frontpages, to Ford. Lewis, who has surveyedthe New York Times
systematically,
says the conservativepaper ran 35 articlesin 90 days. On the
presscoveragein general,see Lewis (1974, pp. 69-77).
10 The famouscase is discussedin Clark (1986, pp. 602-4).
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Did HenryFordPayEfficiency
Wages?
S69
weighton the motivationstemmingfromFord's view that he was in
businessto make money.The act is certainlyconsistentwith thatview
and what Ford knew in earlyJanuary.
II. The Five-Dollar Day Program Itself
The new policy was announced with rhetoricalflourishesbut, as
noted above, without much real publicityon January5, 1914. The
openingsentenceset the tone: "The Ford Motor Company,the greatest
and most successfulin the world, will on January12, inauguratethe
greatestrevolutionin the matterof rewardsforits workerseverknown
to the industrialworld" (Ford Motor Co. 1914). The details were a
reductionin the lengthof the workingday from9 to 8 hours and a
raisein minimumdaily pay from$2.34 to $5.00 a day forthoseworkers
who were judged to qualify.The extracompensationpaid to workers
was labeled as profitsharingratherthan as wages. (We will come back
to this point below.) At the same time, a numberof the company's
to tie to
policies were altered.Some aspectsof the package are difficult
but manyof the centralfeaturesthe efficiency
wage theoryliterature,
writtenoffby historiansto Ford's (undoubted)personnelidiosyncrasiesare preciselythe sortof featuresefficiency
wage theorywould lead one
to expect.
There were three main qualificationsfor eligibility.First,the fivedollarday was extendedonlyto menovertheage of 22. Second,workers
had to have worked with the company for 6 or more monthsto be
eligible.1"Third, in the words of a 1914 Ford pamphlet,"A workeris
only put on the list of profitsharersafterhe has been carefullylooked
up and the companyis satisfiedthathe will not debauch the additional
money he receives"(Meyer 1981, p. 125). A Sociological Department
witha teamof investigators
and a considerablesupportstaff-interpreters,
drivers,cars,and so forth-was set up to carryout thislast provision.
Paternalismis the most commonlyadvanced explanationfor why
women and young men were excluded fromthe Ford profit-sharing
program.The New York Times,afterinterviewinga numberof Ford
officials,
reportedon January7, 1914:
The reasonthatwomen and girlsin the employof the Ford Motor
announcedby the
Companywill not sharein theprofitdistribution
companyis because theyare not,as a rule,the heads of families.In
thisrespect,theyare classed with the youths,the male employees
of less than22 yearsof age not [profit]sharingunless theyhappen
to be marriedor supportingtheirmothersor familiesof brothers
and sisters.It is understoodthatthereare no women or girlsin the
11Thiswas,in fact,notbrought
in untilthefollowing
autumn,
butthereafter
it or a closevariant
remained
as an integral
partoftheprogram
roughly
as long
as theprogram
itselflasted.
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S70
RaffandSummers
If thereshould be,
Ford plant who come underthis classification.
they undoubtedlywould be taken care of. ["Wage Earners Only
Get Ford Bounty" 1914]
A more cynical explanation consistentwith the efficiencywage
hypothesisis offeredby Conot. He writes,"Women did not work on
the assemblyline,and were not likelyto drinkand failto show up for
work. They did not jump fromjob to job. So therewas no reason to
includethem"(Conot 1974,p. 175).12
The motivationforthe 6-monthqualifyingperiod was thoughtto be
even less clear. Unlike the exclusionof women and the requirementof
scrutiny
by theSociologicalDepartment,it receivesvirtuallyno attention
in eithercontemporary
or subsequentdiscussionsof the five-dollarday.
Nevins does discussit briefly,suggestingthatthe intentwas to reward
experienceand reduceturnoveras a matterof fairnessand good business
practice.
But some sortof tenurerequirement
forthe receiptof the supracompetitivecompensationis entirelyconsistentwith the hypothesisthat
Ford was pursuing an efficiencywage strategy.Modern theoretical
analysesof efficiency
wage models based on eithereffortelicitationor
turnoverconsiderations
suggestthatfirmswill profitby tiltingage-wage
profilesrelativeto age-productivity
profiles.13
The performance
incentives
of such tiltingwill be limitedby employees'fear that,if the tilt gets
steep enough,the firmwill be temptedto renegeon its commitments.
So the paymentof efficiency
wages is predictedto coincide with the
limiteduse of bondingdevicessuch as the grantingof highwages only
to experiencedworkers.Nevins specificallycites fearsthatFord would
fireworkersbeforetheir6-monthprobationary
systematically
periodran
out but says that Ford did not do this. It is thus plausible that such
fearsconstrainedFord fromimposingtoo long a probationaryperiod,
whateverhis impulsesabout the appropriatelengthmay have been.
Most historicalaccountsof the five-dollarday devote a greatdeal of
space to discussions of the role of the Sociological Departmentin
regulatingthe habits of Ford workers.Both Lee and Ford themselves
made much of it. They said that teachingtheirworkersgood living
12 Nevins (1954, pp. 547-48) reports that Ford, under pressurefrom his
colleagues,reluctantlyallowed white-collarworkersto share in the five-dollar
day even though he did not see the need to raise theirwages. ("He always
figuredyou didn't need an office.. . . Mr. Ford not being an officeman, he
didn'tunderstandthe routine"[Brown,n.d., p. 118].) He acted,it was said, on
groundsof fairness.This type of behavior is consistentwith the findingof
wage structureis similaracross
Dickens and Katz (1986) thatthe interindustry
occupations.
see Stiglitz(1984) or Katz (1986).
13 For surveys,
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Did HenryFordPayEfficiency
Wages?
S71
habitswas a moral obligationon the company'spart.The messagewas
pointed and clear. Ford pamphletstold workersabout the importance
of taking baths, living in clean, airy, well-lighted,and uncrowded
surroundings,
and saving to buy one's own house. Excessive drinking,
gambling,untidiness,consumptionof unwholesomefoods,and lack of
enthusiasmforputtingmoneyregularlyinto a savingsaccountwere all
potentialgroundsfor exclusionfromthe profits.The 150 Sociological
Departmentinspectorswent to the homes of all workersand had to
certify
thembeforetheiroccupantscould receiveprofit-sharing
payments.
Those workerswho were disqualifiedfromprofitsharingcould get
their full paymentsrestoredif they complied with the Sociological
Department'sinstructions
within30 days.Theycould getpartialpayments
if it took them longer to come into compliance.Once a workerfell
fromgrace,theprofitshareswere donatedto charityuntilhe returnedthiswas a show of good faithon the company'spart.14In all thisthere
seems to be a postureof conscious education,and the company said
repeatedlythatthe interventions
seemedto be welcome.
Accountsof the fractionof workerswho actuallyreceivedpayments
of at least $5.00 a day in spite of thesehurdlesvary.Ford claimed that
all but 1/%receiveda paymentof at least $5.00 a day. Lee wrotein 1916
that69% of the labor forcequalifiedforprofitsharingwithinthe first6
monthsof the plan and thatthisfigurerose to 87% aftera year and to
90% in mid-1916.These figuresappear not to includeworkerswho had
not yet been at Ford for 6 months.Whicheverfigureis accepted,the
overallpercentageis large.
Two otherelementsof the Ford plan meritcomment.First,Ford was
at pains to avoid the capriciousdischargeof workersbut at the same
timeto maintainthe threatthatinefficient
workerswould be discharged.
The founderingworkerwas to be givenseveralchancesto locate a job
he could do well. But ifnone of theseworkedout or if theworkercame
to seem simplya disciplinaryproblem,he was indeed to be let go. The
strategyof tryingto avoid capriciousfiringsby stabilizingemployment
while at the same time threateningto punish genuine shirkerswith
dischargeis exactlythe one predictedby effortelicitationversionsof
efficiency
wage theories.15
Second,Ford executiveslaid considerablepublic stresson thefactthat
it was a profit-sharing
ratherthan a wage-increasingplan.16 This was
intendedto convey a notion that the extra paymentswere giftsto
See theexchangebetweenCarmichael(1985) and Shapiroand Stiglitz(1985).
15As Bulow and Summers(1986) emphasize,the possibilityof an arbitrary
termination
of employmentreducesa worker'shorizon.This makes holdinghis
job less valuableand therefore
encouragesshirking.
16 They were to lay less stresson thisas timepassed and profits
fluctuated.
14
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S72
RaffandSummers
workersratherthanpaymentstheyhad a rightto expect.17
The factthat
theprofitswere beingsharedwithworkerswas said to be a justification
for the company'sconditioningpaymentson workers'spendingtheir
salarieswisely.Labeling the paymentsprofitsharingalso made it clear
thatthecompanywould not feelbound,and certainlycould not be held
to have promised,to continuethe income streamif its own fortunes
sagged. Indeed, the plan was initiallyannounced as an experimentto
whichthe companywas bound only for 1 year.
This discussion of Ford's five-dollarday programgives a picture
broadlyconsistentwith the conclusionsreachedfromour reviewof its
prehistory.Whetheror not the Ford wage increaseswere given for
reasonslike those suggestedby efficiency
wage theories,theyprovidea
naturaltestinggroundforthesetheories.We therefore
turnin the next
two sectionsto eventsoccurringin the aftermath
of the introductionof
the five-dollarday.
III. Were the New Ford Wages Competitive?
A hallmarkof efficiency
wage theoriesis theirimplicationthatsome
firmschoose to pay a wage greaterthannecessaryto attractlabor of the
qualitythey desire." Since firmspaying efficiency
wages pay workers
more than theiropportunitycost, theywill in generalface an excess
supplyof labor and so will findthemselvesrationingjobs. In thissection
we argue that the available evidence stronglysuggeststhat the Ford
Motor Company was payingmore thanthe going wage forthe typeof
This of course does not establishthatFord was
labor it was attracting.
payingefficiency
wages ratherthan simplyexcessivelyhigh wages. In
the next section, therefore,we consider the profitand productivity
consequences of Ford's wage strategyand possible wage-productivitylinks.
The evidencethatthe five-dollarday representeda supracompetitive
wage at least in 1914 and 1915 is overwhelming.We examine the
questionfirstby lookingat the responseof the externallabor marketto
Ford's offerof highwages and thenby consideringtheresponseof those
employedat Ford.As notedabove,Ford did nothaveproblemsattracting
labor even priorto doublingthe wage it paid. The deteriorating
labor
marketconditionsin Detroit and its hinterlandsmeantthat,even with
no wage increase,the lengthof the queues for Ford jobs would have
1Perhaps this should be interpreted
as an instanceof Akerlof's(1982) gift
exchangeefficiency
wage model. We discussthisfurther
below.
18 Put more formally,
efficiency
wage theorieshave the implicationthat the
constraintfacingfirms-thattheyprovideworkerswith a reservationlevel of
utility-does not bind. Eaton and White (1983) are particularlyclear on this
point. Note that it refersto the strategyof a single firm,not the natureof
marketequilibrium.This is fortunatesince our analysisis concernedonly with
Ford's strategy.
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Did HenryFordPayEfficiency
Wages?
S73
been increasingin January1914, all otherthingsbeingequal. As would
be expected,a doublingof the wage, even offeredwith a 6-monthlag,
had a largeeffecton the supplyof labor to Ford.
day,long queues forjobs
Followingtheintroduction
of thefive-dollar
were all too evident.The New YorkTimesreporton January13, 1914,
is typicalof the reportsthatappearedalmostdaily forthe 2 weeks after
the inceptionof the five-dollarday: "Twelve thousandmen,more than
congregatedaroundthe planton any day last week celebratedthe [fivedollar day] witha rushon theplantwhichresultedin a riotand turning
of a firehose on the crowd in weatherbut littledifferent
fromzero.
. . . The crowd began formingat 10 o'clock last nightin spite of a
blizzard. As a last resortat about 8 o'clock this morningthe police
As soon as the job huntershad dried or
got out the water hose.
changedtheirclothingtheycame back" ("JobSeekersRiot, StormFord
Plant" 1914).
There is evidencethatan excess supplyof labor seekingjobs at Ford
persistedeven afterworkersgave up on liningup outsidetheplantgates.
The Ford Archivescontaina letterfromthe Ford legal departmentto
the Sociological Department dated April 1915 indicatingthat two
entrepreneurs
who had chargedlarge numbersof would-be Ford employees $0.50 or $1.00 for writinglettersof applicationto Ford had
been induced to give up the practice(Hartman 1915). It is hard to see
why Ford would object to this practiceif it was activelyseekingmore
workers.More tellingperhapsis the observationthatlarge numbersof
workers migratedto Detroit in the hope of gettingjobs at Ford.
Eventually,it provednecessaryforFord to make a rule thatno worker
would be hiredwho had not alreadylived in Detroitfor6 months.
Furtherevidenceof the supracompetitive
wages beingofferedat Ford
in Detroit.The
comes fromthe reactionof other auto manufacturers
treasurerof one firmwas quoted as saying,"The Ford plant can only
give employmentto so manymen and afterthatthe otherswill have to
seek employmentin otherplantsat the prevailingwage" ("Other Auto
Men Say They Do Not Expect Plants to Be Affected"1914). Nevins
goes so faras to assertthatthe Ford plan benefitedall the automobile
companiesin Detroitby swellingthepool of availablelabor. (Even after
it was announcedthatFord would not hireworkersfromout of town,
thousandscontinuedto streamin to Detroit.)
The economist'sstandardresponse to evidence of this type is to
suggestthatthe increasein wages was intendedto improvethe quality
of the workersFord was attracting.In this case, the apparentexcess
supply of labor would have reflectedonly the low skill levels of the
workers applying, levels inferiorto those of the workers actually
engaged.This line of argumentdoes not seem veryrelevantto the Ford
experience.Ford made no effortto replace his work forcewith new,
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S74
Raffand Summers
morehighlyskilledworkerswhen he raisedwages. Abell (1914, p. 306)
noted,"The Ford Motor Company does not wish to changethe present
standardof labor in its plant. Three quartersof the employeesare of
foreignbirth;a large numberof themnon-Englishspeakingand of the
grade ordinarily fittedfor common labor.
. .
. The increment added to
wages under the plan will not resultthereforein the attractionof a
forthe class at present
highergrade of workmenand theirsubstitution
we know about the technicalchange
employed."Certainly,everything
under way is consistentwith this. Finally,if the goal were to attract
betterworkers,it is hard to see why Ford would excludeworkersfrom
othercitiesfrombeinghired.
The long queues forjobs at Ford seem to belie theview thattheFord
highwage was merelya compensatingdifferential
(to the sortof people
on the queues) for unpleasantworkingconditions.19
the
Furthermore,
behaviorof workerswithinthe plant casts seriousdoubt on the compensatingdifferential
explanation for the five-dollarday. If it were
correct,one would expectthatthe radicalchangein the conditionsand
wages package would not be to the tasteof some workers,who would
then quit. On the other hand, if the change were simply toward an
equilibriumin which workerswere paid more than theiropportunity
cost,one would expectto see the quit rateplummet.
In fact,as we discussbelow, turnoverdeclinedprecipitouslyafterthe
introductionof the five-dollarday. Abell (1915, p. 37) reportsthat the
quit rate fell by 87% betweenMarch 1913 and March 1914. A similar
comparisonis provided by Fisher (1917, p. 15), who concludes that
turnoverfell from400% to 23% between the period October 1912October 1913 and the subsequentyear. Slichter(1921, p. 233) gives the
figures370% forcalendaryear 1913 and 54% for 1914.
Anecdotalevidenceon whetherthe five-dollarday was necessaryas a
The experienceof Charles
compensatingdifferential
appearsconflicting.
Madison,a skilledmechanicwho leftthe Dodge plant to work at Ford
and then returnedbecause he was "too fatiguedafterleavingthe Ford
factoryto do any serious readingor attenda play or concert"seems
atypicalin more respectsthan just Madison's leisure tastes (Madison
1980/1981).Being a skilled mechanic,Madison was welcomed back to
Dodge. (The Dodge foremanwas not surprisedto see him again.) But
most of the Ford employees lacked Madison's skills. There is more
insightinto the situationat the Ford plant in the observationsof Leslie
McDonnell,a Ford worker,who recalled,"It would almosthaverequired
whodidnot
It mightbe arguedthatthequeueswerecomposedofworkers
lifewas insidetheFordplant.Even granting
realizehow unpleasant
this,an
excesssupplyoflaborwas nevertheless
readilyavailableto Ford.
19
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Did HenryFord Pay Efficiency
Wages?
S75
Table 2
Ford Motor Company Net
Income, 1910-15
1910
1911
1912
1913
1914
1915
Nominal
($)
(1910 $)
4,163,451
7,338,588
13,542,678
27,087,204
31,757,769
40,307,167
4,163,451
7,413,464
13,139,301
26,452,347
30,419,318
36,901,187
Real
SOURCE.-Nevins(1954,p.647).The 1914and 1915
figureshavebeen(crudely)adjustedto putthem,like
the others,on a calendaryearbasis.The real values
use thegrossnationalproductdeflatorfromU.S. Department
of Commerce(1975, p. 224).
the use of a riflein orderto separatethe averageFord employeefrom
the payroll"(McDonnell, n.d.).20
On balance, it seems fairto inferthat the introductionof the fivedollar day representeda decision to pay more than was necessaryto
attractworkers.Indeed, it is hard to see how a sudden doubling of
wages paid given constant or deterioratingopportunitycosts could
possibly be explained in any other way. Whetherthe five-dollarday
have been motivatedby profitmaximimightreasonably,in retrospect,
zation is anothermatter.We turnnextto the questionof whetherit was
in fact,as HenryFord claimed,"one of thefinestcost cuttingmoveswe
evermade" (Ford 1922,p. 147).
IV. Was the Five-Dollar Day Profitable?Why?
Some crude statisticson Ford Motor Company profitsare given in
table2. Profitsrose steadilyin both nominaland real termsin 1914 and
1915. Recall thatthe out-of-pocket
cost of the five-dollarday program
was estimatedto be $10 millionfora year in which total profitswere
forecastat only $20 million.
Where did the money come from?Two contemporariesdiscussed
Ford productivityquite explicitly.Abell (1915, pp. 33, 36) appears
detached,thoughobviouslyveryimpressedby the Ford experiment.He
beginsby asserting,"Conditionsin industrycould hardlyhave provided
a moreseveretestforprofitsharingplans thantheyhave undergonefor
the past year.Distributionsto employeeshave been suspendedby some
of those organizationscommonlyaccepted as the leaders in successful
20 For a careful
and thestructure
of thelocal
examinationof skillrequirements
labor marketrevealingthe underlyingconsistencyhere,see Raff(1986, sec. 7).
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RaffandSummers
S76
management.By way of contrastthe comparativefinancialstatementof
the Ford Motor Company as of September30, 1913 and September30,
1914 is a strikingly
interesting
and significant
document."
Abell providesan estimateof the productivitygains resultingfrom
thefive-dollar
day as well. He concludeson thebasis of Ford's testimony
beforethe IndustrialRelationsCommissionthatbetween1913 and 1914
the Ford company produced 15% more cars per day, with 2,000, or
about 14%, fewerworkersand a reductionin the numberof hours
increment
worked per worker.This figureunderstatesthe productivity
becausenew productiontechniquesraisedsignificantly
theshareof Ford
several car parts that had
value added in each car by manufacturing
previouslybeen purchasedfromother suppliers.Even withouttaking
any account of the increasein Ford value added or the reductionin
increment.
hoursper day,his figuressuggestclose to a 30% productivity
Lee is said to have calculatedthatthe Ford plan raisedwages by 105%
but labor costs by only 35% implyingabout a 50% improvementin
productivity
(Nevins 1954, p. 548). It is not clear that this calculation
took account of the increase in value added per car that occurred
in 1914.
These estimatesare confirmedby the available quantitativeinformation.Table 3 presentssome information
drawnfromthe Ford Archives
on the cost of makingthe Model T chassis.Despite the drasticincrease
in the wages Ford paid, totalcosts actuallydeclinedbetweenDecember
1913 and December 1914, even fullycountingallocated overhead.The
sharpdeclinein the costs of materialscorroboratesthe suggestionmade
above thatthe fractionof value added generatedinside the Ford plant
was increasedin 1913.
Similardetaileddata are not availableon thecostsof othercomponents
of Ford cars. But the productivityquestion can be addressedcrudely
following
usingaggregatedata. To isolateany incrementin productivity
the introductionof the five-dollarday in January1914, we estimated
multipleregressions
relatingthelog ofproductivity
(measuredalternatively
using totallabor hours and total productionlabor hoursin the denomdummies
inator)or seasonal dummies,a time trend,and (alternatively)
Table 3
Selected Monthly Cost Figures for the Model T Chassis, 1913-15
($)
Materials
December1913
March1914
June1914
1914
September
December 1914
122.23
Labor($)
($)
Overhead
17.03
22.66
26.18
25.86
34.94
34.54
105.07
23.54
99.28
24.39
106.29
94.69
31.40
32.52
accession125(ModelT CostBooks).
SOURCE.-Ford
Archives,
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S77
Wages?
Did HenryFord Pay Efficiency
Table 4
Effectof the Five-Dollar Day on Productivity
DummyTime
Period
1914
1914-15
Log of Outputper
Production
Worker
Log of Outputper
Worker(Total
WorkForce)
.655
(.164)
.530
(.155)
.528
(.177)
.414
(.166)
datacomefrom
accession
922(monthly
SOURCE.-Regression
FordArchives,
data).Theperiodis 1912-18.
production
including
seasonal
equations,
NOTE.-Estimates arebasedon regression
anda timetrend.
Standard
errors
aregiveninparentheses.
dummies
for 1914 and for 1914 and 1915. The data are monthlyand the period
1912-18.The resultsdisplayedin table4 suggesta substantial
productivity
increment of between 40% and 70% following the introduction of the
giventhatno
five-dollar
day. These figuresare probablyunderestimates,
accountis takenof theincreasedshareof value added thatwas generated
insidethe Ford plant.
An alternative
and somewhatindependentway of lookingat theeffect
is to considerits effecton prices.
of the five-dollarday on productivity
If it representeda substantialcost increase,one would expectto see an
abnormalincreasein priceand reductionin profitsat itsinception.Table
on prices.It is clear thatpricescontinued
5 presentssome information
theirdownwardtrendin 1914 at about the same pace thattypifiedthe
reasonperiod 1910-20.As we have alreadyobserved,profitsperformed
ably well despitefallingprices.
Table 5
Model T Prices, 1910-21
Nominal Price
Real Price
950
780
690
600
550
490
440
360
450
525
507
397
950.0
787.9
669.4
585.9
526.8
448.6
359.3
236.7
263.1
269.0
227.9
214.0
($)
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
(1910 $)
SOURCES.-Ford
(1922,p. 145)andU.S. Department
ofCommerce
(1975,p. 224).
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S78
Raffand Summers
Table 6
Separations from the Ford Motor Company for
Se ected Months, 1912-14
December1912
March 1913
October 1913
March 1914
5-Day Men
Discharges
Quits
3,594
5,156
322
166
176
1,276
137
166
386
870
326
115
SOURCES.-Abell (1914, p. 49) andFord(1916, p. 7628).
The Sourcesof IncreasedProductivity
We are therefore
drivento the questionof whetherthefive-dollar
day
itselfcaused the productivityimprovementsor merelycoincided with
the introductionof productivity-enhancing
technologies.In order to
answerthis question,we examinepossible mechanismsthroughwhich
wage increasesmay have directlyincreasedproductivity.
The historicaldetailsof technicalchangeclose offinterestin efficiency
wage theoriesbased on selectionconsiderations.
These theorieshold that
the point of the highwages is to encouragemore highlyskilled(and so
moreproductive)individuals,the higheropportunity
cost of whose time
would certainlybe known to them,to select themselvesto apply for
jobs. But the industrialjournalistsArnold and Faurote (1915, pp. 4142), writingabout the Ford factoryfor a technical audience in this
needs: "As to machinists,old-time allperiod, record very different
around men, perish the thought!The Ford Company has no use for
experiencein the working ranks,in any way. It desires and prefers
machine tool operatorswho have nothingto unlearn,who have no
theoriesof correctsurfacespeeds for finishing,frombell-timeto belltime." To a firstapproximation,the company did not want skilled
workers.It would thereforehardlyhave been willing to pay to find
them.Ford engineerswere deskillingthe jobs.21
The second theoryhas increasedwages increasingproductivityby
reducingturnovercosts.We have notedthat,priorto thefive-dollar
day,
turnoverrates at Ford had reached dramaticheightsand that they
subsequentlydeclinedverysharply.Table 6 presentsthe only detailed
information
thatis availableforparticularmonths.22
Thereare difficulties
in judging just how much of the drasticdecline in turnoverbetween
1913 and 1914 can be attributedto the effectsof the five-dollarday. As
21 For a historicalnarrative,see Hounshell (1984, pp. 217-62). For some
statisticson the evolutionof skill requirements
in the plant,see Meyer (1981,
pp. 48, 50, 51).
22 It is clear that therewas once much more,but our archivalsearcheshave
not,as yet,turnedany of it up. We suspectit simplyhas not survived.
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S79
Wages?
Did HenryFord Pay Efficiency
Table 7
Annual Turnover Rates, 1913-15
Averageforceemployed
Total leaving
Turnoverrate(%)
Resignations
Layoffs
Discharges
1913
1914
1915
13,623
50,448
370
39,575
2,383
8,490
12,115
6,508
54
5,199
385
926
18,028
2,931
16
2,871
23
27
SOURCE.-Slichter(1921,p. 244).
we notedabove,theextentto whichthereformsof October 1913 solved
day is unclear.
theturnoverproblempriorto theadventof thefive-dollar
Moreover,thesharpeconomicdownturnthathad hitDetroit'shinterlands
the cityitselfby late springtimewould
by late 1913 and was afflicting
havesubstantially
reducedturnoverevenifwages had notbeen increased.
Raff(1986) arguesthat this effectalone may have accountedforup to
halfthe declinein turnoverbetween1913 and 1914.
But thereis a more troublesomeproblemwith this explanationthan
these timingissues. Paymentsto the duly-qualifiedworkersdid rise
radicallywith the adventof the five-dollarday. In orderto rationalize
the five-dollarday on grounds of reduced turnover,however, it is
necessarythatthe cost to firmsof turnoverbe considerablyreduced.In
order to make a crude assessmentof the savings,we begin with an
expressionforthe user cost of labor:
c = w + (i + q)T,
wherew is the wage,i the relevantinterestrate,q the turnoverrate,and
T trainingcosts. The crucial question is whetherthe decline in q
associatedwiththe five-dollarday made the second termshrinkenough
to reducethe totaluser cost on balance.
It is instructive
to insertsome plausible values into the formulafor
the user cost of labor. Since we have w on a daily basis,we want i and
q on a daily basis. On a daily basis, any reasonableannual i is zero.
Puttingannual turnoverratesfor1913 and 1914 (whichwe do possesssee table 7) on a dailybasis,the cyclicallyadjustedchangein q is .520%.23
The calculation then turns on the size of T. Raff (1986) examines
contemporarycalculations of the trainingand breaking-incosts of
various grades of labor and a Ford plant survey of trainingtimes
23 The adjustment
followsthe conservativesuggestionof Slichter(1921, p. 32).
The detailedsurveyhe refersto on pp. 33-34, which mighthave yieldeddata
does not seem to have survived.
fora moresophisticatedcorrection,
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S80
RaffandSummers
thesameproduction
conducted
(withreference
to essentially
process)in
1917.He concludesthatsettingT equal to a week'spay (i.e.,$30) is
somewhere
betweenaccurateand generous.
Assuminga valueof $30 forthe turnover
cost,one thencalculates
thatreducedturnover
savedthefirms
about$0.16perday.Evenallowing
forthefactthataftera timeworkersdid not earnthefive-dollar
day
until6 monthsaftercomingon thejob and thatsomeworkers
werefor
it remains
one reasonor anothersimplyineligible,
difficult
to conclude
thatmorethanabout6% ofthecostofthefive-dollar
dayprogram
was
offsetby increasedwages. Even the most favorableof the pairs of
turnover
numbersin table 6 yieldsonly 19%. These are verysmall
fractions.
This calculationdoes,however,presumethatthe relevantturnover
costsaresimpletraining
costs.It is veryplausiblethatturnover
imposed
new workers.
costsotherthantraining
First,turnover
largelytookthe
formof workers
notshowingup forworkand thenafter5 daysbeing
firms
declaredto havequit.Presumably,
withhighturnover,
werevery
needsand so frequently
unsureof theirstaffing
either
foundthemselves
shorthanded
or withunnecessary
workers.Second,in a highlyfluid
it maywellhavebeenthecasethatmorethanone worker
environment,
had to changejobs foreach personwho left.In thiscase, a single
couldrequiretraining
departure
coststo be bornea numberof times.
was associatedwithdissatisfaction,
it maywell
Third,whendeparture
haveinvolveda negativeeffect
on theproductivity
of others.Sabotage
is onlyan extreme
withforemen,
whichwas
example.Overtconflict
is another.
verycommon,
A thirdalternative
forhow a wageincreasemightraise
explanation
is thathigherwagesmightelicitincreased
effort.
productivity
Suppose
is verifiable
effort
onlyat somecost.If wagesaresetat a levelat which
willautonomously
thereis a utility
costto losinga job,workers
choose
and control.
formonitoring
to workharder:highwageswillsubstitute
Thereis ampleevidencethatworkersworkedharderaftertheintroductionof the five-dollar
day. Table 8 shows a pronouncedfall in
in discharges
forexample.Evenmoredramatic
reductions
absenteeism,
appear to have been realized.Abell (1915) reportsthat discharges
declinedby90% betweenMarch1913andMarch1914,whileLee (1916)
Table 8
Absenteeismat Ford
Total Workers
NumberAbsent
PercentAbsent
12,548
12,645
1,250
311
10
2.5
October6, 1913
October6, 1914
SOURCE.-Abell
(1915,p. 37).
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Did HenryFord Pay Efficiency
Wages?
S81
notes that therewas only one dischargeat Ford in the early part of
1916. The decline in dischargesmay well reflectboth alteredpersonnel
policies (the company both tryingto keep its employeesand having
figuredout ways to make those it had given up on decide to leave
in employeeperformance
to
withoutbeing fired)and the improvement
be associatedwithincreasedcost of job loss.24
It is difficultto gauge the effectof these changes on productivity.
of less easily
They are probablybest thoughtof as visiblemanifestations
quantifiedchanges in workers' behavior. Certainly,there is ample
anecdotalevidencethatworkhabitsin theFord plantchangeddrastically
followingthe introductionof the five-dollarday. Klann, a production
foremanat the time, described the change in the company's labor
strategysimply:"[They] called us in and said that since the workers
were gettingtwice the wages, [themanagement]wanted twice as much
work. On the assemblylines,we just simplyturnedup the speed of the
lines" (Klann, n.d., p. 84). Harold Slausen (1914, p. 263), a journalist
reviewingtheFord experience,
concluded,"But as muchas themonotony
of each man's workmightbe expectedto lead to discontenttheprospect
of wages double those thatcould be obtainedin any otherfactoryfor
the same work servesas a deterrentand positionsin the Ford factory
are eagerlysoughtfor."Arnoldand Faurote(1915, p. 331) describedthe
resultsof Ford's strategywhen theywrote,"The Ford high wage does
away with all of this inertiaand livingforceresistance.The workingmen are absolutelydocile, and it is safe to say thatsince the last day of
1912, everysingle day has seen markedreductionsin the Ford shops
labor costs."
A difficulty
with the effortelicitationefficiency
wage explanationfor
theproductivity
increasewithintheFord plantis thatmanyof thekinds
of malfeasanceFord soughtto controlwere probablyeasy to monitor.
Absenteeismis only the most obvious example. The coming of the
assemblyline must have made monitoringworkers'speed easier (Raff
1986, sec. 6). Increasedease of monitoringmightbe expected,on the
efficiencywage theories,to lead to decreased ratherthan increased
wages. On the other hand, it is apparent from Mathewson's (1931)
classicworkthatin automobileproductiontherewas substantialscopeeven for the workers with routinizedjobs-to collude and restrict
output.25
More important,the cost to Ford of any shirkingby workerswas
characterof
increasingsharply,given the increasinglyinterdependent
24
to quit,see,e.g.,Bondie
foundto induceemployees
On waysthecompany
(n.d., P. 11).
25See Mathewson
(1931);thepassageson pp. 21-22 and 125 deal explicitly
withassemblylines,but thereare manyothercogentpassages-seep. 61 in
particular.
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S82
RaffandSummers
production.More intensiveuse of fixedand quasi-fixedfactorsthrough
smoothcoordinationof work flows(or, more abstractly,
throughdedicated,Model T-specificphysicaland humancapital)was the real source
of theprofits.It is revealingin thisregardthat,in additionto influencing
the workerthroughthe use of the assemblyline and sharplyincreasing
wages, Ford also increased the relativenumberof supervisorsin his
plant drasticallybetween 1913 and 1915 (Meyer 1981, p. 56). This
suggeststhatthe increasedcost, and risk,of shirkingfollowingroutinization and the introductionof the assemblyline was a more important
thantheautomaticmonitoring
consideration
thesemechanicalinnovations
provided.26
The questionof cooperationraisedin theprecedingparagraphsbrings
us finallyto what might be called "morale-based" efficiencywage
theoriessuch as theone proposedbyAkerlof(1982). Morale explanations
in general,and Akerlof'sgiftexchanges in particular,have received
relativelylittleattentioncomparedto otherefficiency
wage theories.But
it is quite plausiblethatthe higherwages mighthave raisedmoraleand
contributedto the Ford plant'sproductivity.
The Ford shops were certainlyno workers'paradise in 1914. The
companyproudlyclaimedthatit crowdedworkersand machinestogether
extraordinarily
tightlyto take advantageof everyavailableinch of space
on the shop floor.It even filledthe air with work in progress.There
was no particulardignityin work at the plant. Thus therewas ample
scope forFord to raise morale.The changingtechnologyalso increased
the importanceto Ford of "buyingthe peace" and avoidingsystematic
soldiering and output restrictionor other collective action by his
work force.
The companycoupled wage increaseswith explicitconcernwith its
workers'senseof dignity.Thereis evidenceto suggestthattheemployees
were quite pleased withtheirnew lot. There were manyFord clubs and
societies.Nevins(1954,p. 549) remarksthatworkerswore theirnumbered
company ID badges with pride to dances and other social events.In
mustnevertheless
contemporary
Detroit,theseotherwiseraw immigrants
men of substance.The company
have seemed,in theethnicshantytowns,
even triedto help thembecome citizensand encouragedthemto vote.
Other aspectsof the Ford programbesidesthewage increasecan also
be seen as directedat potentialmoraleproblemsand theirconsequences.
For characterinvestigations
werenot theonlyactivityof theSociological
Its Englishclasses,withtheirlessonsorientedself-consciously
Department.
toward "American" home life, a high school civics-stylepicture of
and democracy,and, most striking,the
Americanhistory,government,
26 On all this,
and in particular
on thesenseof riskas wellas cost,see Raff
(1986,sec.9).
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Wages?
Did HenryFordPayEfficiency
S83
and labor relations,appear in
generalsubjects of industrialefficiency
exercise
in formingworkers'attitudes
retrospectas much an elaborate
It
as a programof language training." is also plausible that, in the
contextof the costs of malfeasancebeing more easilyimposed by large
thecompanymayhavebeen tacitlybargaining
groupsthanby individuals,
policies ratherthanjust respondingto
with workersin its wage-setting
function.Rent sharingwas going on in a contextin
a fixed-reaction
mattered.These
which historyand beliefs(as distinctfrompreferences)
which to some extentstand outsidethe established
two considerations,
wage theory,even of the mixed shirking-morale
corpus of efficiency
variety,are developedin detailin Raff(1986).
On balance it seems fairto conclude thatFord was able, by offering
the five-dollarday, to reduce the turnoveramong his workersand to
fromthem.
extractmuchmoreintensive,and generallyproductive,effort
These developmentscomplementedthe revolutionin the production
process,and so in work content,that Ford was bringingabout. They
allowed him to realize thatrevolution'sfullcommercialvalue.
V. Conclusions
Henry Ford's five-dollarday arose at least in part out of concern
about turnoverand poor worker morale and their consequences for
cost
productivity.
Ford's wage surelyexceededhis workers'opportunity
him
The
did
increased
wages
and put
in the positionof rationingjobs.
and
profits.
productivity
benefits
yield substantial
A naturalquestion raised by this studyis the extentto which other
firmsemulatedFord. To the extentthattheydid, some evidenceforthe
of Ford's actionsis provided.While it is
efficiency
wage interpretation
obvious thatsudden doublingsof wages did not become commoneven
afterFord's actions,thereis evidencethatFord's actionsdid affectwage
concludes
patterns.Rae (1965),in his historyof theautomobileindustry,
that, as other firmseventuallyintroducedFord's technologies,they
emulatedhis high-wagepolicies.By 1928,beforetheUnitedAutomobile
Workershad become an importantfactorin the automobileindustry,
(Rae
wages were almost40% greaterthan in the restof manufacturing
1965,p. 127; see also Brissendon1929,pp. 96-97).
In futureresearchit would be usefulto examinethewage-productivity
nexus at otherfirmsas well. This would also permita judgmentabout
the breadthof the relevanceof our findings.The Ford Motor Company
as few companiesin the contemporary
was dedicatedto manufacturing
Americaneconomycan be. The overwhelming
majorityof its staffwere
27See Marquis (1916, p. 911) and, for some glimpsesat materials,Roberts
(1912a, 1912b)and the materialsfromThe Small Accession1544,Ford Archives,
Dearborn,Michigan,quoted at lengthin Raff(1986).
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S84
RaffandSummers
actuallyworkingon production.A pessimistwould conclude that the
dramatictechnologicaldevelopmentsin theFord plantmakeit extremely
atypical.An optimistwould say that,if one could findevidencehere,
thereis real promisein so muchless routinizeda collectionof enterprises
as the Americanmacroeconomytoday.
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