Rising wages for workers create a "virtuous cycle." For all his flaws, Henry Ford started a revolution by raising wages.
Today in middle-class history Henry Ford doubled the wages of his production workers in 1914 to $5 a day.
Adjusted for inflation, that would come out to $118.67 in 2015 dollars, almost $15 an hour for an eight-hour day (in 1926, Ford Motor became one of the first major corporations to adopt a five-day, 40-hour workweek). This applied to male workers and was extended to women in 1916.
Contrary to myth, it was not done so workers could afford Ford automobiles. Instead, it was a reaction to high turnover and the resulting costs from production downtime and retraining.
The turnover ceased and in two years Ford’s profit doubled.
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Whatever the proximate cause, Henry Ford’s move had wide repercussions, helping propel the rise of the blue-collar middle class. It cemented worker loyalty and increased productivity. In addition, workers had more money in their pocket and eventually could buy such products as cars. This is the “virtuous cycle” that venture capitalist Nick Hanauer cites in calling for a better deal for American workers.
Henry Ford could be a crank. He was a forebear of today’s tech billionaires who confuse their cleverness and luck in one field with having omnipotent expertise in all areas. Like many Americans of his age, he was anti-semitic. He was also no friend of unions. Not until 1941, after a bitter struggle, did Ford sign a contract with organized labor. And he was what would today be considered a paternalistic employer.
To be sure, Ford’s decisions were partly driven (haha) by a desire to undercut labor unrest. And a skeptic would wonder how much this could apply to today. Ford and the automakers forced to follow his lead had the wind at their backs in a unique moment in history. It was the rise of cars as a staple of American society, a vast new industry creating millions of jobs and a wide universe of suppliers.
On the other hand, automobiles would have remained playthings of the rich if Ford and other innovators had not found ways to bring down their costs — and, often dragged along into the future by unions, sharing the fruits of productivity and profitability more equitably with workers. It was good business and good for economic mobility.
Today, labor’s share of income is by far the lowest it has been since the measurement began in the late 1940s. Productivity has become disconnected from wages. And wages have stagnated or even fallen for most workers. All this — with its many causes — is a key driver of rising inequality.
Today’s Econ Haiku:
Investors from all over
Blowing a bubble?