Wage Determination Theory and the Five-Dollar Day at Ford

Author:

Raff Daniel M.G.

Abstract

This paper examines the five-dollar day compensation policy instituted by the Ford Motor Company in 1914 in light of recent developments in wage-determination theory. The new wage was above the opportunity cost of the labor employed. Yet various efficiency wage theories, by which high wages increase output, are shown to provide an implausible explanation. The particular (and epochal) technical change that occurred at Ford and the attitudes and beliefs of relevant actors suggest instead a rent-sharing theory driven by the threat of collective action by labor. This confluence, not the money, marks the episode as a watershed.

Publisher

Cambridge University Press (CUP)

Subject

Economics, Econometrics and Finance (miscellaneous),Economics and Econometrics,History

Reference38 articles.

1. For Ford, contrasts, and some thought-provoking comparisons, see my “Ford Welfare Capitalism.”

2. The first references to widespread rising wages in this sector in Detroit that I have found are contemporaneous with the arrival of orders connected with World War I. This seems unrelated.

3. So much was this true that when, slightly later in the 1920s, the Manchester managing director sought permission from Dearborn to cut wages, he seems to have felt he ought to begin his arguments with a ritual obeisance. The key passage begins “High wages are a sound investment on our part, but …” Letter from Perry to Edsel Ford of 7 August 1928 in Ford Archives Select File.

4. Carbon copy of letterfrom Sorensen to H. S. Jenkins dated 9 September 1926 in Ford Archives Accession 38, box 52.

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