Henry Ford famously paid his workers more than the market wage. In 1914 he told

Question

Henry Ford famously paid his workers more than the market wage. In 1914 he told his board of directors that he wanted to pay $3 a day when the going wage was $2.20. One of the board members snidely asked why not pay $4 or $5 a day; Ford immediately agreed (much to the shock of the board) and started paying $5 a day. So, occasionally, firms find it beneficial to pay above (or even below) the equilibrium wage rate. a) Why do you think a firm would pay its workers (office, factory, etc.) above-market wages? b) Why do you think a firm would pay its managers above-market wages? c) Some firms used to set up employment contracts where workers were paid below-market wages early on and then above-market wages later in a worker’s career. Why do you think these types of contracts were used? Also seen with these contracts was a pre-determined mandatory retirement date; why would this be an important part of such a contract?

Explanation / Answer

a) In the competitive market environment,firm has to retain its employees. Hence sometimes firm offers the wage which is higher than the market wage.

b) Managers play crucial role in the growth and development of firm. Thus firm always looks for competitive and qualified managers, thus firm is ready pay above the market rate

c) Some firms used to set up employment contracts where workers were paid below-market wages early on and then above-market wages later in a worker’s career. During the initial phase employees are not skilled. Firm spend heavily on the growth and development of skills of employees. Hence on later stage firm offers hefty salaries to employees.

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