Revolutionary

01.06.14

Henry Ford Understood That Raising Wages Would Bring Him More Profit

A century ago, the Ford Motor founder shocked the world of business by doubling wages to $5 a day. No altruist, he was playing a long game—one today’s short-sighted CEOs can’t fathom.

On January 5, 1914, the business world witnessed a revolutionary, shocking act. Henry Ford, founder, chief executive officer, and dictator of the Ford Motor Company, unilaterally raised—doubled!—the wages of thousands of production workers to $5 per nine-hour day, from about $2.38. Ford’s company was the unorthodox leader of what was rapidly growing into an iconic American industry. And Henry Ford was already regarded as an eccentric, an outsider, somewhat strange. “Crazy Henry,” the neighbors dubbed him when he tinkered in his garage. As Ford grew into his role, he did little to disabuse the public of that sobriquet, chartering a ship to Europe and sailing with anarchists in a vain effort to end World War I; backing an anti-Semitic newspaper, the Dearborn Independent; and taking a paternalistic interest in the social lives of his employees.

But the pay hike was something else. By paying a wage that was significantly above what the market required, Ford was betraying his fellow business owners and putting the whole of American enterprise in jeopardy. The Wall Street Journal editorial page, then, as now, a hotbed of revanchism, sniffed: “To double the minimum wage, without regard to length of service, is to apply Biblical or spiritual principles where they do not belong.” Ford may have been seeking a place in heaven, the Journal warned, but this action would more likely consign him to hell. Ford has “in his social endeavor committed blunders, if not crimes. They may return to plague him and the industry he represents, as well as organized society.”

Of course, Ford was motivated more by self-interest than by altruism. Turnover was huge in the growing auto industry, as workers hopped from factory to factory in search of better wages. The nation was in the midst of a rising wave of labor activism that frequently turned to violence. International networks of communists, socialists, and various other types of radical syndicalists were organized and active in America’s largest cities—and occasionally tossed bombs at business owners. Raising wages proactively was clearly a way to buy some short-term labor peace.

But Ford was playing a deeper, longer game. The Ford Motor Company was in the business of building an expensive durable good. The first cars he had built in number, the 1903 Model N, cost about $3,000, and so were accessible only to that era’s one percent. Henry Ford recognized that the automobile would be more successful as a volume business than as a niche product. “I would build a motorcar for the great multitudes,” he proclaimed. Through relentless innovation, vertical integration, and the obsessive development of an assembly line, Ford had already managed to bring the cost of the Model T, the first democratic car, down to about $500. And the company was moving about 250,000 cars a year. But per capita income was only $354 in 1913. The U.S. didn’t have a developed consumer credit industry. People paid for things with the wages they earned and their savings.

So this was Ford’s theory: Companies had an interest in ensuring that their employees could afford the products they produced. Put another way, employers had a role to play in boosting consumption. While paying higher wages than you absolutely needed to might lower profits temporarily, it would lead to a more sustainable business and economy over time. If the motorcar was going to be a mass-produced product for typical Americans, not a plaything for the rich, Ford would strive to pay his workers enough so they could afford the products they worked on all day.

Ford, of course, was right. And the rest is industrial history. The $5 day didn’t kill Ford, or American capitalism, as many capitalists had warned. By 1916, profits doubled and sales continued to boom. “The payment of $5 a day for an eight-hour day was one of the finest cost-cutting moves we ever made,” he said. By 1921, Ford had half the U.S. car market and, thanks to falling costs and rising wages, the price of a Model T stood at about half the level of per-capita income. Ford pioneered a massive new industry whose wages set the tone for the country and turned Detroit into a high-wage metropolis.

More significantly, Ford’s heretical proclamation was the first in a series of acts of individual and collective action, from the private and public sectors, that improved the lot of the typical worker in America and helped pave the way for the broad-based prosperity of the second half of the 20th century. In the 1920s, acting out of a mixture of paternalism and self-interest, many large companies started pensions, began offering health-care benefits and clinics, and boosted wages. Government did its part, too. Legislation passed in the 1930s empowered unions and enforced a federal minimum wage. In the 1940s and 1950s, an entente between big labor and big government—the five-year, no strike, annual-raise, expanded-pension deal between General Motors and the United Auto Workers in 1950 became known as the Treaty of Detroit—led to further increases in living standards.

Of course, corporate America has largely forgotten Ford’s insight. Worse, it has made a concerted effort in recent years to drive down wages.

Were Henry Ford to come back to earth today, 100 years after he promulgated the $5 day, he’d be shocked and dismayed.

Until 1975, wages generally amounted to 50 percent of gross domestic product. Labor essentially held its own through the 1980s and 1990s; in 2001, wages still constituted 49 percent of GDP. But by 2012 they were 43.5 percent—a modern-day low. Median household income fell in both 2010 and 2011, and the median income for working-age households fell 12.4 percent from 2000 to 2011, to $55,640, a period in which the U.S. economy grew by 18 percent. The chart of wages as a percentage of GDP and corporate profits over the last several years looks like the gaping maw of a hippopotamus.

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. In the aggregate, U.S. corporations are in a better position to pay higher wages than they have been at any time in recent history. But bosses have been choosing not to raise wages even when they can. “I always try to communicate to our people that we can never make enough money,” as Caterpillar CEO Doug Oberhelman put it. “We can never make enough profit.” Caterpillar notched record profits in 2012 and then in early 2013 bludgeoned its unions into accepting a six-year wage freeze.

Henry Ford was one of the largest employers of his day, and he stood foursquare for higher wages, paying more than the market forced him to. He established new benchmarks and standards. But today’s CEOs think nothing about paying non-subsistence wages and are shocked when anyone has the temerity to push back.

Here’s the thing. The human cost of low wages is obvious and has been extensively documented. But there are important economic and business costs to low wages that are far less clear and little understood. Many of America’s largest employers pay as little as possible, driving down the consuming power of their workers, and then wonder why their customers are unable to spend.

Were Henry Ford to come back to earth today, 100 years after he promulgated the $5 day, he’d be shocked and dismayed.