, Volume 24, Issue 4, pp 683-694

Did Henry Ford mean to pay efficiency wages?

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Abstract

In the past two decades economists have developed efficiency wage theories, which suggest a link between wage rates and worker productivity, while attempting to explain the existence of involuntary unemployment in equilibrium labor markets. Henry Ford's 1914 announcement of the five-dollar day, an overnight doubling of wage rates, is regularly used as the textbook application of efficiency wage theories put into practice. While previous research demonstrates that the effects of the five-dollar day were largely consistent with those predicted by efficiency wage theories, Ford's wage policy was principally motivated by the fallacious wage-aggregate demand link expressed by the so-called“high-wage doctrine”-a belief that many economists claim significantly contributed to the unemployment problem of the 1930s. In addition to exploring Ford's high-wage motives, I discuss the role Ford's wage statements and policies played in the acceptance and implementation of high-wage public policies during the Great Depression.

I appreciate helpful comments from Ranjit Dighe, George Selgin, and participants at the Economic and Business Historical Society meetings.