On 5th January 1914 the Ford Motor Company Announced That It Would More Than Double the Wages of Its Workers. Briefly Describe the History of This Decision and Relate to the Theory of Incentives and Efficiency Wages.

In: Business and Management

On 5th January 1914 the Ford Motor company announced that it would more than double the wages of its workers. Briefly describe the history of this decision and relate to the theory of incentives and efficiency wages.

When Henry Ford introduced the five-dollar day on the 12th of January 1914, many of his competitors might have questioned the success of this policy. Today, it is well established that Ford’s strategy was a key reason for the company’s early success and is often documented as an exemplary application of the efficiency-wage theory. This essay will briefly outline the history and implications that have led to the five-dollar day and relate it to the theory of incentives and efficiency wages.
Henry Ford founded the Ford Motor Company in 1903. During the first few years the company remained relatively small and it was only with the introduction of the T-Model in 1908 and the transformation to assembly line production that Ford could expand his market share and increase the company’s profitability.
However, as Raff and Summers noted, assembly line production resulted in a high degree of specialisation of the different production steps. Work at Ford’s became more and more menial, leading to dissatisfaction among the workforce, which reflected in a significant annual turnover of 370% in 1913.
Although there was no evidence that Ford had problems filling his vacancies, the absenteeism and high turnover undoubtedly resulted in costs that Ford had aimed to reduce. It is, however, disputed whether reducing turnover and absenteeism were the main motives in introducing the five-dollar day. Raff and Summers highlight that Ford might have been influenced by his friend Percival Perry, who successfully doubled the wage rate before Ford, or that he was driven by personal motives. Jason Taylor, on the contrary, argues that Ford was primarily motivated by the...

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