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History, Henry Ford and the minimum wage

By Michael M. Bates
web posted January 9, 2006

Henry FordIn 1914, Henry Ford made history. The auto manufacturer established an unheard of $5.00 a day minimum wage in his factories.

Former Chrysler chairman Lee Iacocca, also known as I-ka-zizzle in a TV commercial in which he plays straight man to the redoubtable artiste Mr. Snoop Dogg, wrote in Time Magazine that Ford "shocked the world with what probably stands as his greatest contribution ever: the $5-a-day minimum-wage scheme. The average wage in the auto industry then was $2.34 for a 9-hr. shift. Ford not only doubled that, he also shaved an hour off the workday."

Whether that was Henry's greatest contribution is questionable. Less uncertain is what his primary motivation was in raising employee wages and reducing work hours.

It wasn't, as has been argued, because he wanted to establish a solid-middle class to buy his product. Nor was it an act of charity. In the magnate's own words, it "was one of the finest cost-cutting moves we ever made."

Henry Ford was acting in his company's best interests. His factories had been plagued with very high turnover rates and excessive absenteeism. This was to be expected. Almost all jobs (at least the ones I've had) are monotonous, but assembly line work, performing the same procedure over and over all day long, must be extraordinarily tedious. Many employees looked for, and found, better alternatives.

Hiring replacement workers and training them were too expensive. Something needed to be done.

The higher wage Ford offered made the jobs much more attractive. Morale shot up, employee turnover sharply dropped, and, most important from management's perspective, productivity surged. Henry Ford was on his way to being a billionaire.

Interestingly, advocates of increases in government-mandated minimum wages or what's called the Universal Living Wage (ULW) cite the Ford experience as a reason their proposals should be adopted.

On its Web site, the National Coalition for the Homeless includes a white paper on the ULW that enumerates the results of Henry Ford's revolutionary move and then notes: "All of these savings/benefits are possible today with the enactment of the Universal Living Wage. The ULW will dramatically reduce employee turnover."

But would it? If all employers are required to pay the same minimum salary, what incentive would people have to stay where they're at?

When Santa Fe, New Mexico was giving consideration to raising the city's minimum wage in 2003, the 1914 pay hike was also introduced as evidence that it was a good idea. On this New Year's Day, the minimum wage paid to most employees in Santa Fe was raised to $9.50 an hour. Next year it'll go to $10.50 an hour.

The city's proposal had been challenged in court, but the lawsuit was thrown out by the same judge who recently granted a restraining order to a woman who claimed talk-show host David Letterman was using coded words, gestures and eye expressions to express his undying love over the airwaves. Such is the quality of Democratic jurisprudence in parts of the Land of Enchantment.

So has Santa Fe's increased minimum wage helped the working poor? Not according to a study released last month by the nonprofit Employment Policies Institute.

Authored by economics professor Dr. Aaron Yelowitz, the research found that the likelihood of unemployment for employees in Santa Fe went up by 3.3 percent. And for less-educated workers the likelihood of unemployment was more than double that. Moreover, workers put in fewer hours on the job than prior to the legislated increase, with less-educated employees again disproportionately affected.

One group that did benefit from the higher minimum wage was unmarried high school employees. Significant evidence suggests they displaced low-skilled adults.

Keep in mind that Dr. Yelowitz's research covers the period in which the minimum wage was still set at $8.50 an hour. At the higher rates, the results should be even more profound.

The people who were supposed to be helped are the very ones who are hurt. The pesky law of unintended consequences strikes again.

A genuine increase in wages has to be linked to greater productivity, not the magic wand of government. Henry Ford understood that. Maybe even I-ka-zizzle and Snoop Dogg do. Unfortunately for workers with marginal skills, many lawmakers don't.

Mike Bates is the author of Right Angles and Other Obstinate Truths. This essay appeared in the January 5, 2006 Oak Lawn Reporter.

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