Henry Ford’s $5 A Day And The Ridiculous $15 An Hour McDonald’s Minimum … – Forbes

Posted: Sunday, May 25, 2014

It’s been said that those who don’t pay attention to history are doomed to repeat it. And a corollary could be that those who don’t understand historical events could be fooled into bad policy by their misunderstandings. So it is in the New York Times (and this error is common enough elsewhere) and the view that Henry Ford started to pay the then unprecedented sum of $5 a day to his workers so that they could afford to buy his cars. This is such a silly thing for people to believe that it’s really quite remarkable that anyone does. But here is that argument in all its glory:

When Henry Ford realized it was good business to pay employees enough to buy the products they built, it was a breakthrough, not only because the idea challenged the reflex to pay as little as possible, but because the product was a car. He was talking real bucks.

McDonald’s has mislearned the lesson.

In response to escalating protests by McDonald’s employees calling for higher wages and the right to form a union without retaliation, McDonald’s chief executive, Don Thompson, defended the company at the annual meeting on Thursday, saying that McDonald’s pays a competitive wage.

That’s a reasonable enough logical leap there. If Ford did raise wages so that his workers could afford his cars then McDonald’s McDonald’s raising their wages so the workers can eat more burgers isn’t a stretch by any means. However, there’s a horrible error right at the start of the argument. For Ford didn’t raise wages so that his workers could afford his cars. What actually happened is that he hired and then lost some 52,000 workers a year in order to have a stable workforce of 14,000. This obviously had vast costs in trying to hire and then train all of these workers: as well as the costs when they walked off the assembly line disrupting production. The doubling of wages to $5 a day reduced those costs by more than the extra pay cost him. Which is why he did it.

We can go on to prove that he didn’t do it for the extra sales as well, as I did do back here.

Car production in the year before the pay rise was 170,000, in the year of it 202,000. As we can see above the total labour establishment was only 14,000 anyway. Even if all of his workers bought a car every year it wasn’t going to make any but a marginal difference to the sales of the firm.

We can go further too. As we’ve seen the rise in the daily wage was from $2.25 to $5 (including the bonuses etc). Say 240 working days in the year and 14,000 workers and we get a rise in the pay bill of $9 1/4 million over the year. A Model T cost between $550 and $450 (depends on which year we’re talking about). 14,000 cars sold at that price gives us $7 3/4 million to $6 1/4 million in income to the company.

It should be obvious that paying the workforce an extra $9 million so that they can then buy $7 million’s worth of company production just isn’t a way to increase your profits. It’s a great way to increase your losses though.

Ford simply didn’t raise his wages so that his workers could buy his products. So to argue that McDonald’s should raise wages so that their employees have more spending power cannot be said to be learning a lesson from Ford’s actions.

There are two other errors in the piece as well. The first being that the CEO of McDonald’s actually has any influence over the wages paid in the restaurants. The company doesn’t own and run the stores: that’s the province of the franchisees. And it is they, in response to their local labour markets, that determine the pay of the staff. And then there’s this:

The McDonald’s workers are asking for $15 an hour. That sounds like a lot compared to the current minimum wage of $7.25 an hour and compared to the Democratic proposal to raise the minimum to $10.10. But it’s actually closer to where the minimum wage would be today if it had kept pace over the years with growth in labor productivity.

There is no link at all between what the minimum wage should or should not be and average labour productivity. Even conceptually the link can only be between low skill labour productivity and that minimum wage. It’s entirely true to say that average labour productivity has risen in the US in recent decades. That’s as a result of the increased mechanisation of the way that we produce many things. But there’s no evidence at all that low skilled labour productivity has risen over that same period. And thus no argument that the minimum wage should have risen in lockstep with average productivity.

Of the three points of course the most important one is that Henry Ford simply did not raise wages so as to increase the sales of his cars. So to start arguing that anyone else should increase their wages to increase their sales is basing the argument on something that simply didn’t happen.


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