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Principles of Economics- Mankiw (5th) 582

Principles of Economics- Mankiw (5th) 582 - Ford’s...

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600 PART NINE THE REAL ECONOMY IN THE LONG RUN CASE STUDY HENRY FORD AND THE VERY GENEROUS $5-A-DAY WAGE Henry Ford was an industrial visionary. As founder of the Ford Motor Com- pany, he was responsible for introducing modern techniques of production. Rather than building cars with small teams of skilled craftsmen, Ford built cars on assembly lines in which unskilled workers were taught to perform the same simple tasks over and over again. The output of this assembly process was the Model T Ford, one of the most famous early automobiles. In 1914, Ford introduced another innovation: the $5 workday. This might not seem like much today, but back then $5 was about twice the going wage. It was also far above the wage that balanced supply and demand. When the new $5-a-day wage was announced, long lines of job seekers formed outside the Ford factories. The number of workers willing to work at this wage far ex- ceeded the number of workers Ford needed.
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Unformatted text preview: Ford’s high-wage policy had many of the effects predicted by efficiency-wage theory. Turnover fell, absenteeism fell, and productivity rose. Workers were so much more efficient that Ford’s production costs were lower even though wages were higher. Thus, paying a wage above the equilibrium level This story illustrates a general phenomenon. When a firm faces a surplus of workers, it might seem profitable to reduce the wage it is offering. But by reducing the wage, the firm induces an adverse change in the mix of workers. In this case, at a wage of $10, Waterwell has two workers applying for one job. But if Waterwell responds to this labor surplus by reducing the wage, the competent worker (who has better alternative opportunities) will not apply. Thus, it is profitable for the firm to pay a wage above the level that balances supply and demand. W ORKERS OUTSIDE AN EARLY FORD FACTORY...
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