Henry Ford Paid His Workers $5 a Day So They Wouldn't Quit, Not So They Could Afford Model Ts
Over at Bloomberg View, Megan McArdle, in a post titled “ Employees Are Not Your Customers” happens to use one of the more enduring myths of automotive history to prove her point. That myth is that Henry Ford started paying his famous $5 a day wage in 1914 so his employees could afford to buy Model Ts. She was using the story as an example to make a specific point so Ms. McArdle doesn’t tell her readers the real reason why Henry started paying a more livable wage. That gives us an excuse to learn some history.
The other day, I noted in passing that it is arithmetically impossible, except in some bizarre situation with little bearing on the real world, to make money by paying your employees more and thus enabling them to afford your products.
Someone asked me to show my work. So let’s run a simple model based on Henry Ford’s legendary $5-a-day wage, introduced in 1914, which more than doubled the $2.25 workers were being paid.
That’s about $700 a year, almost enough to buy a Ford car (the Model T debuted at $825). Now let’s assume, unrealistically, that the workers devoted their extra wages to buying nothing but Model Ts; as soon as they bought the first one, they started saving for the next.
Is Ford making money on this transaction? No. At best, it could break even: It pays $700 a year in wages, gets $700 back in the form of car sales. But that assumes that it doesn’t cost anything except labor to make the cars. Unfortunately, automobiles are not conjured out of the ether by sheer force of will; they require things such as steel, rubber and copper wire. Those things have to be purchased. Once you factor in the cost of inputs, Ford is losing money on every unit.
But can the company make it up in volume, as the old economist’s joke goes? Perhaps by adding the workers to its customer base, Ford can get greater production volume and generate economies of scale. But Ford sold 300,000 units in 1914; its 14,000 employees are unlikely to have provided the extra juice it needed to drive mass efficiencies.
So if Henry didn’t pay his employees more money so they could afford his automobiles, why did he pay them $5/day? Well, the answer to that question involves another one of those automotive legends.
That particular myth is that Ford invented the assembly line or, more in a more modest version, he was the first to use an assembly line to build cars. Henry understood the value of publicity and very early on he started to put together a public relations effort that went far beyond simple advertising. Ford’s publicity machinery cranked out the image of the mechanical and business genius from Dearborn, the farm boy who made it big. I’d be surprised if Ford’s propaganda team didn’t originate the notion that Henry Ford invented the assembly line. In fact, though, Ransom E. Olds was building cars with an assembly line process a decade before Ford moved from the station assembly process to assembly lines. When Ford built the big Highland Park plant in 1910, it used station and sequential assembly processes until 1913.
That’s not to say that Henry Ford wasn’t a manufacturing innovator. Ford’s great contribution to mass production was reducing assembly to the simplest tasks, something a minimally trained person could do. It’s well known that Ford changed the automobile industry from producing luxury cars and toys for the wealthy to making mass market transportation devices. Those luxury cars were often hand-built by skilled craftsmen. In addition to changing what cars were, Henry Ford also changed who made cars, from skilled fabricators and artisans to semi-skilled industrial workers.
Thousands of job seekers descended upon the Highland Park Ford plant after Henry Ford announced his $5/day wage.
Going to an assembly line process with simplified tasks allowed Ford to massively ramp up production. Production went from 94,662 in 1912 to 224,783 to 1913, the first year of the assembly line. Ford and his lieutenants first use of an assembly line was for putting together the innovative magneto that was a critical component of the Model T. By the time they initiated final assembly on a line, almost the entire Highland Park plant was using that process for subassemblies. That way they worked out the kinks in the process.
Ford’s assembly lines along with Ford’s embrace of Taylorism (also known as Scientific Management) which included things like timing employees with stopwatches, plus the fact that Henry’s factories, modern as they were in their day, were noisy and dangerous (at the Rouge complex, started in 1916, there was an office tasked with placing employees into jobs who had hitherto been somehow disabled on the job), made working for Ford in 1913 a miserable existence. In 1913, Ford had to employ over 40,000 new hires just to keep 13,000 workers on the job. Even with only minimal training needed, that kind of employee turnover will kill a business model based on productivity, as Henry’s Model T plan was. In order to reduce his employee turnover rate, Ford made the logical decision: pay them more and they won’t quit. It worked.
It’s true, however, that Ford’s increased wages (paid as a bonus, not available to all employees and subject to having their lives spied upon by Henry’s “Social Department”) did ultimately increase the market for inexpensive automobiles. Overnight, the wage floor for automaking in Detroit, already the center of the industry, doubled. In short time $5/day was a standard wage. Still, Megan Mcardle’s point must be stressed, paying your employees enough money to afford your products is no business model. At best it’s transferring money from one pocket to the other while incurring some costs that likely will not offset profits on those sales. While many car companies do offer employee discounts today , those are only possible because of profitable retail and fleet sales.
While Henry Ford may be unfairly credited with inventing the assembly line, he usually doesn’t get any credit for an innovation of his that has made the lives of working men and women much more pleasant, the weekend. Having the weekend off from work is conventionally attributed to organized labor. The labor movement has given workers a lot of things, but not the weekend. That, too, was Henry Ford’s innovation. Originally, Ford employees worked a six day work week, with 9 hour days. That was reduced to five and a half days, with a half day on Saturday. I don’t know if it was Henry’s idea or not, but he finally figured out the math. His business model, as mentioned, was productivity. There are 24 hours in a day and running two 9 hour shifts meant that his factories were sitting idle for 6 hours a day, 2/3rds of a full shift. By going to an eight hour workday and a five day standard work week, Ford was able to run his factories with three shifts, 24 hours a day. Eliminating the half shift on Saturdays meant that, with overtime, FoMoCo plants could run 24/7/365 if he wanted.
Ronnie Schreiber edits Cars In Depth, a realistic perspective on cars & car culture and the original 3D car site. If you found this post worthwhile, you can get a parallax view at Cars In Depth. If you think that 3D is a plot to get you to buy yet another new television set, don’t worry, all the photo and video players in use at the site have mono options. Thanks for reading – RJS
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Why do I bother reading the comments here? Some folks have WAY too much time and WAY too little compassion for the world.
If you've got minimum skills, minimum education, show minimum motivation and provide a minimum contribution to the workplace, why should someone be forced to pay you more than the minimum wage? Minimum wage jobs are generally entry level positions. They were not intended to be the job that you support your family on. BUT, when you have people that fit into the above category, they do not understand the concept. I've worked with folks that have the attitude of "I'm doing the bare minimum, because they pay me the bare minimum." That's self-defeating. WIth that attitude one will NEVER excel and earn an adequate living. Work is called that for a reason. If one wants better, one has to put forth exceptional effort while realizing less than exceptional recognition. This will change in time and one will either be fairly compensated - OR will have acquired a skill level that makes them more valuable to another employer who does value their work ethic and pay them accordingly. A related issue to all this is the fact that our currency is not tied to a tangible standard (Thank you Nixon administration). You've probably all heard this: A 1963 quarter could buy one a gallon of gas - give or take - in 1963. That same quarter today is worth around $5.00 - give or take - due to the content of silver in the coin. That same 1963 quarter will buy you a gallon of gas with some change left over if you consider it's "value". So our money hasn't truly "lost" value. Unemployment before going off the gold standard was around 3% consistently. Up until lately no better than 6%. While I will admit that it isn't THAT simple - to me there seems to be a connection. Our currency was also stronger when we were on a standard. As it is now, when the government needs more money, they just crank up the presses. More currency tied to what - air? Being tied to a standard would eliminate this inflationary practice and eventually return us to a more stable economy. What is necessary is someone with the nerve to do it in spite of all outcry to the contrary. I have really enjoyed the article and ALL of the discussion. At least there some thinking individuals left and I enjoy reading what they have to say. Thanks all!