Low productivity for low wages – and vice versa

One of the greatest capitalist entrepreneurs of all time, Henry Ford, famously declared: “There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible – it’s not the employer who pays the wages, employers only handle money – it’s the customer who pays the wages”

Ford went on to double the minimum wage  at his factory, from $2.25 to $5, so his workers had the purchasing power to buy his cars – they also became more loyal to his firm

Ford also knew he and his managers had to be very cost-conscious whilst paying the highest wages possible – the latter forced them to rethink internal processes and their way of doing things – creativity and innovation were thus stimulated, leading to productivity improvements and increased competitiveness

A forced hike in wages was thus found to be a powerful stick and tasty carrot to boost productivity

Nowadays, this counter-intuitive logic has been turned on its head – the received wisdom is that productivity improvement leads to higher profits which leads to higher wages being possible

For example, Jerome Powell, chair of the US Fed, says: “Wages should reflect inflation and productivity – slow wage growth is certainly due partly to low inflation and low productivity” – although he is unclear on why employers are not paying higher wages when the labour markets are so tight, US unemployment being a mere 4%, the lowest in 20 years

And Professor Chang Ha-Joon of Cambridge University further muddies the water by saying: “Wages in rich countries are determined more by immigration control than anything else”

But, according to Juliet Samuel in a Daily Telegraph article: “If wages don’t rise, Britain will remain stuck in the slow lane, on the road to permanent economic decline” – she accepts that the 70s taught us runaway, out-of-control wages are the high road to ruin for they make industries internationally uncompetitive and deter investment – “but the problem we now face is at the opposite end of the spectrum”

She refers to Robert Allen’s book on the British Industrial Revolution and asks why the Revolution started in the UK, on this rainy, weather-beaten island – why did it make sense for British business to invest in technological innovation whilst the French and Italians did not?

Allen answers:

  • In 1725, the average worker in London ate about twice as much meat as his counterpart in Florence
  • Wages were high in London
  • Labour was so expensive that it made sense to invest in labour-saving devices
  • Hence the spinning jenny, steam engine and so on were invented

Samuel then destroys an old saw – she claims it was not agricultural innovation that freed up labour from the countryside to move to towns and become available for factory work – it was intense demand for labour that lured people from farms into towns and workshops and, even then, the huge risk and cost of inventing new machinery was still worth it

So why were wages so high in London compared to other cities – apparently, the phenomenon started in London before spreading to other parts of Britain?

Samuel offers two explanations:

  • The great plague had cut the city’s population by about a fifth – and very quickly
  • The enormous expansion in global trade, driven by imperial conquests, created ferocious demand for labour – dockworkers, sailors, cloth factory workers and so on

Nowadays, Britain’s population is growing, albeit slowly, aided by immigration – average wage levels have also been growing slowly, if at all:

  • Cutting immigration should help wean some very-low productivity sectors like construction and farming off cheap labour and on to productivity-enhancing capital investment – but the overall impact here would be small
  • Global trade is growing at a much slower rate than in the past, so keeping demand for labour and wage levels down
  • Government powers to raise average (not minimum) wage levels are both constrained and very limited
  • Major new technology and innovation may or may not be forthcoming in the near future – and they usually takes years to be adopted widely

Hence, according to Samuel:

  • “We’re left crossing our fingers and hoping that wages pick up due to independent factors”
  • “We’ve been looking at the problem backwards”
  • “Necessity really is the mother of invention”


  • Henry Ford’s rule worked well

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