Henry Ford wage hike: boon or bust?

A Rube Goldberg machine may be more efficient than a Henry Ford wage hike. | Profound Whatever / Foter.com / CC BY-NC-SA

One hundred years ago, Henry Ford defied his fellow capitalists by doubling his workers’ wages.  It was a profitable boon, enabling his employees to finally afford the product they produced, the automobile.  Daniel Gross at the Daily Beast suggests that employees today should emulate Ford’s wage hike.  Is this a sound recommendation?

“All else being equal”–ceteris paribus–is an indispensable caveat to all economic theories.  A little scrutiny reveals that nothing is equal in comparing Henry Ford to employers today.

Gross literally describes Ford as a “dictator.”  He’s right.  Back then, Ford answered to a few private investors, but major employers today are accountable to open market shareholders.  Ford Motor Company eventually went public in 1956, and it was a good thing, too.  Market accountability makes the difference between CEO-approved assembly lines and Politburo-inflicted bread lines.

Differing labor market conditions also advise against a Ford-like wage increase.  Turnover and its associated costs were higher in 1914.  HR departments have learned a lot since then.  Significant overhead savings have already been captured, unlike in Ford’s pioneering days.  High turnover remains the norm for low-value added jobs like fast food service.  Still, crack open the Wall street Journal, which Gross dismisses as “revanchist,” and one will learn that employers are far from uninterested in improving work conditions.  Think of Google’s work site barbershop and sleep pods.

Not only do market conditions make the Ford wage hike inadvisable, but its accomplishments are oversold with a rhetorical sleight of hand.  Gross credits Ford with achieving an economy of scale, enabling the first “democratic car.”  But prior to the wage hike, the company was already moving 250, 000 cars a year, hardly an elite clientele.

Missing from the heart of Gross’ s case are findings that Ford’s own employees significantly broadened the consumer base.  It may as well have been an exogenous factor; perhaps instead it was World War I that boosted demand and decisively convinced Americans of the automobile’s utility.

In debunking an earlier incarnation of the Ford myth, Forbes writer Tim Worstoll notes another major deficiency.  Take Boeing, another durable goods manufacturer.  Paying a worker more there will not enable her to buy her own 777 airliner to enjoy on the weekend.

The Ford hike is a shot in the dark, an indirect Rube Goldberg way to increase demand.  Not to mention a blunt instrument.  Employers have more precise methods for such ends, like commercial advertising.  Some loathe ads as vacuous and soul crushing, but they increase demand by raising the value of the product in the mind of the consumer.  And the ad industry employs many thousands.

Other ways of increasing consumption include the tried and true coupon, the sales discount, and the rebate.  These only induce voluntary transactions.  Even if government wanted to raise consumption on a macro level, these inducements are much more equitable than the job killing minimum wage increase, which 85% of economists opposed in one recent survey (h/t Wintery Knight).

So it seems there’s no substance to recommend Ford’s wage hike.  What is Gross accomplishing with this piece, then?  He paints a straw man of inexplicably stubborn industrialists, saying that “. . . bosses have been choosing not to raise wages even when they can.”  If Henry Ford saw what employers are doing now, he’d be “shocked and dismayed.”

The straw man ultimately issues from a pervasive, unnamed menace:

There’s something deep in our contemporary and political culture, in the public and private sectors, that supports the proposition that employers should pay as little as possible at all times, at every point in the economic cycle.

He doesn’t say it, but he may be alluding to the misleading Keynesian bogeyman known unflatteringly as “trickle down economics.”

Employers are diverse and face many different circumstances.  Rather than acting as some monolithic cabal, each pays what their market and their bottom line allows.  Second-guessing employers is bad policy, and shaming market competitors into “doing their part” is harmful politics.

Certainly, there are often times when workers should get raises.  And cost of living adjustments are a good way to make sure that a rising tide keeps lifting all boats.  But the Henry Ford wage hike is more like income redistribution agitprop than good business advice.