Question

In a famous experiment, dating from 1914, Henry Ford introduced a daily wage of $5, which was approximately twice the prevailing wage at the time. The evidence suggests that this policy did indeed pay off in terms of greater effort, lower absenteeism, and other benefits.

Discuss:

1. How is that possible? Which mechanism could possibly lead to this outcome?
2. Do you see any application of this policy experiment in your sector?

Answer 1

Solution

It is given that Henry Ford has increased the daily wage to $5 from around $2.50 approx.It yielded many benefits which include lower absenteeism ,reduction in the company's turnover rate thereby retention of it's best employees.

The increased wages were offset by the increase in production,reduction in the training cost for employees and also reduction in the cost associated with hiring new employees.Also the increased wages now  allowed it's own employees to purchase it's vehicles as they could afford the same.This in-turn also fueled the sales turnover of the company.

Yes I see application of this policy experiment in the IT sector.The Top notch companies including Google and Microsoft follow the same principle.Their workforce is very less when compared to their peers (ie.,their number of employees is less in compared to the sales turnover)

So, the wage rate in these companies average around at least 2-3 times the prevailing rate in the market.

This leads to increase in very high employee productivity,less employee turnover,very less employee training cost and very less cost involved in hiring new employees)

Note: Not every company that takes up this experiment yields positive results.The company should be able to support the increase in wage rate initially,in other words,this increase in wage rate may take some time to yield positive results such as increased productivity etc.,

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