Advocates of mandating higher wages sometimes resort to the myth that businesses actually gain from doing so because their workers are then able to buy more of their products. Almost invariably, they point to Henry Ford’s 1914 pay raise as proof that they’re right. If mean old Henry Ford saw the wisdom in raising worker pay, why not force all employers to do so?

In the letter below, Professor Don Boudreaux eviscerates that idea, recently advanced on Huffington Post by former Labor Secretary Robert Reich, who is an endless fountain of economic misconceptions.

Editor, The Huffington Post

Dear Editor:

Robert Reich repeats the urban myth that Henry Ford’s 1914 increase in the daily wage of most of his workers from $2.34 to $5.00 was meant to better enable these workers to buy the Model T cars that they produced (“What Walmart Could Learn from Henry Ford,” Nov. 17).

The fact is that Ford raised pay (and also reduced the work day from nine to eight hours) in order to retain workers. Before 1914 – and contrary to the prediction of those who insist that employers have monopsony power over non-unionized workers – workers quit their Ford jobs at extraordinarily high rates. This high rate of worker turnover was costly to Ford. Ford successfully sought to decrease this turnover by making employment in his factories much more attractive.

That Ford’s motive was not to enable his workers to buy Ford cars can be shown with simple arithmetic. Here’s Forbes columnist Tim Worstall (making an assumption most favorable to Reich’s case, namely, that every one of Ford’s employees would buy a new Ford car every year): “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.”*

In short, Mr. Reich’s history is bunk.

Sincerely,
Donald J. Boudreaux
Professor of Economics