'Henry Ford's $5 workday' - Essay Example

Henry Fords $5 Workday Henry has a positive and precautionary way of handling the issue of the level of employee wages. He clearly draws his ideas and foundational logic from the Efficiency-Wage Theory. Henry Ford had the option to pay minimum wages to his employees, i.e. $2.50 per day. However, he opted to pay his employees $5 per day, increasing the appeal of employment with Ford. This move was supplemented by the announcement of the increase in pay. This attracted numerous potential employees this provided him with a variety of talents to choose from.

The company developed an effective strategy that increased output by motivating the employees. When employees are contented, they would tend to put in more effort in their work, producing quality in a sustainable manner. This also positioned the company strategically to outwit competition by increasing production at cheaper price owing to economies of scale.Henry’s Ford’s increase of the daily pay-rate to $5 had a positive impact on employees’ performance and output. This can be described in four ways.

Worker EffortAn employee who is paid well is more likely to put in more effort in the daily endeavors and tasks within the organization (Mankiw, Kneebone and McKenzie, Principles of Microeconomics). Compensation is directly proportional to the amount of effort an employee puts in their work.Worker HealthAn employee who is paid well is more likely to have a balanced and healthy diet. This is because disposable income determines an employee’s expenditure limits. Therefore by paying workers better, the company reduces incidences of sick leaves, ensuring continual production.

Quality of LaborThe better pay at Ford attracted high quality and even experienced employees. This availability of labor motivates the contracted employees to work at their optimal level as they can be easily replaced (Mankiw and Scarth, Macroeconomics : Canadian edition). This is known as adverse selection.In conclusion, by increasing employee compensation, Henry Ford strategically increased his production, output, sales and profits, while mitigating employee turnover. This concept is largely employed in the modern business world, where employees offer wages above the equilibrium wage.

Works CitedMankiw, Gregory N. and William Scarth. Macroeconomics : Canadian edition. New York: Worth Publishers, 2004. Print.Mankiw, Gregory N., Ronald D. Kneebone and Kenneth J. McKenzie. Principles of Microeconomics. Toronto: Nelson Education, 2014. Print.