Marginal product of labor - what is it, what is its value?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Whatever the company does, it works for the result in any case. And this result is the output. The product of production can be either tangible or intangible. At a machine-building plant, cars are the product of production, at a candy factory, sweets, in the medical field, the number of patients served, at a university, the number of graduates.

Different resources are used in the production of products. These are money, equipment, land, fossils, human labor. Labor is also a product. It is divided into general, average and marginal. The marginal product of labor is the additional expansion of production resulting from an increase in one unit. At the same time, the other factors of production remain unchanged.

How is the marginal product of labor

The volume of products manufactured by the company, of course, depends directly on the number of employees. The average product of labor shows efficiency(productivity) of the work of the team as a whole. For example, 24 masters made 10 tables in an hour, and 12 masters of another salon made the same number of products in the same period of time. This means that their work is more efficient.

What does the marginal product of labor really represent?

The marginal product of labor equals the increase in output divided by the variable resource. In other words, this indicator makes it clear how much productivity increases due to the use of a new variable resource in the same unit of time. For example, a new resource could be a new workforce, equipment, or technology.

How many workers to hire

For any company striving for successful operation and development, it is important to determine how many people are needed to work as efficiently as possible. It would seem that the more employees, the higher the volume of production? Not at all.

When the average marginal product of labor reaches its maximum, it will become equal to the value of the marginal product. This means that an increase in the number of employees will lead to a decline in production. This equality can be determined by a special calculation that takes into account at least two variable resources - labor and capital.

What determines wages

With a fair and correct calculation, the head of the company can determine the highest possible wages for the work of hired employees, while maintaining the growth of the profits of his enterprise. Wage and marginal product of laborinterdependent concepts. When the enterprise maintains the optimal ratio of variable resources and the number of labor resources involved, then there is an increase in productivity. Accordingly, this leads to stable wages. If the enterprise does not have enough variable resources (for example, the same amount of capital invested in production), then attracting new units of labor will eventually lead to decreasing productivity, which subsequently affects the wages of the staff as a whole.

Everything is in close connection from formulas and calculations

Given that the marginal product of labor is additionally produced products by attracting an additional labor unit, it is also necessary to take care of investing additional capital in production. A simple example: if a firm invests in the purchase of 100 tons of meat for the production of sausages, and 100 employees of the firm produce products, then with an increase in staff by 50 additional jobs, the firm will reduce its profits due to the need to pay additional wages to new employees.

And the quantity of output is the same. It turns out that with an increase in the number of employees, it is necessary to increase the purchase of raw materials. Therefore, increase the invested capital. But so that the marginal product of labor and the capital invested in production have the proper ratio. That is, the additional amount of output produced should bring income to the company in excess of the invested capital costs.

Interesting fact

Of course, any employee dreams of getting more pay at work. Money is needed primarily to satisfy material needs. By working more, a person earns more income. This is ideal. But over time, when income increases so much that it covers all basic needs, there comes a period when the worker prefers leisure rather than work. And no longer strives for greater productivity in the process of performing their duties. Thus, when wages rise, the income effect conflicts with the substitution effect.

Not at a loss

When determining the optimal amount of attracted labor resources, it is worth considering all available indicators. This includes the number of employees, and total costs, and marginal costs, and overall productivity. When hiring a new employee, the head of the company looks at how much the revenue from his work is commensurate with the costs that are inevitable with the need to hire him.

And here such concepts as the marginal product of labor in monetary terms and the marginal product of labor in physical terms arise. The first is the cost of labor. This is a cost to the business. And that salary must be competitive. Otherwise, good employees will look for other firms where their work will be appreciated. At the same time, the head of the company is not en titled to set wages for labor that exceed or equal the income that the labor of the employee brings.

Features andneed for modernization

As long as the profit of the enterprise exceeds the cost of labor, the head of the company can invite new employees to work and receive additional profit. The marginal product of labor will rise. But there is another way: without expanding the staff, the company invests additional costs in the modernization of production.

Updating equipment, increasing labor productivity due to this, the company ensures profit growth.

The marginal product of labor in monetary terms shows how much the total income of the firm has grown when using the same labor units with the use of progressive modern equipment. With the correct calculation, the cost of equipment will pay off in a certain period of time and will begin to bring net profit. And this is more profitable than hiring new employees whose costs remain unchanged or even increase.

Ratio of labor to capital income

So, the marginal product of labor is an additional product. It is obtained using additional labor units. And the marginal product of capital is the additional goods and services received as a result of additionally invested money. And the company is interested in purchasing new technologies until the marginal product equals the real cost of capital. The company will receive economic profit when it pays for all stages of production, there will also be “money from above”. More broadly, the national income as a whole is then distributed overincome of workers, income of capital owners and economic profit.

Interesting fact

One of the US senators - Paul Douglas - in 1927 thought about a strange phenomenon. The indicator of national income has not changed for years, working and business people alike enjoy the results of increased production and a progressing economy. The senator wanted to know the reason for the constancy of the shares of production factors and turned to the famous mathematician Charles Cobb for calculations. This is how the famous Cobb-Douglas production function was born, confirming that the ratio of labor to capital income is unchanged. And the shares of production factors depend only on the share of labor in income, but do not depend on the number of factors themselves and the level of development of the industrial industry.

Flexible manufacturing process

A competent manager will always find the perfect combination of production factors in order to increase profits and reduce the costs of the enterprise. Recall that the marginal product of labor is closely related to the amount of capital used. With the growth of output of goods and services, the marginal product will increase, and vice versa - with a decrease in output, it also falls.

It is not enough just to increase the number of services and goods produced. It is more important that these goods are in demand and sold. The value of the marginal product of labor is equal to the income from the marginal product of labor for any amount of resource used. Search and find markets for the sale of goods, be able to negotiate and implementcompetitive goods and services is the task of the head of the company and his assistants.

Declining Productivity

There is such a thing as "the law of diminishing productivity". It is brought to the rank of "law", because it is characteristic of all industries without exception. That is, this is what happens: a gradual increase in any of the factors of production per unit initially brings profit, but then from a certain moment it begins to decrease. Thus, at first there is an increase in the value of the marginal product of labor, and then this value is reduced. Why is this happening?

At a time when labor costs are low and capital is still unchanged, the head of the firm decides to increase the unit of labor. And this results in increased profits. But when there are a lot of employees, and the invested capital remains the same, some of the employees work inefficiently, and then the profit of the enterprise falls.

A simple example: there are 10 people working on the potato harvest. But then the eleventh worker comes, but the volume of production does not change with his arrival, since the land is the same, the harvest is almost the same. In this case, as a rule, without reducing the staff, the company introduces technological improvements, and the volume of output grows again. That is, on the same land plot, you can grow a richer crop using the latest technologies. Then the cost of paying the wages of the eleventh employee will be justified by the increased profits of the company.

Work only with profit

So, the marginal productivity of labor and the marginal product of labor are interrelated concepts. And they mean an increase in the volume of production due to the use of an additional unit of labor. The head of the company takes into account all factors of production in the preparation of short-term and long-term plans. He tries to be flexible in improving production processes, observing the dynamics of all indicators.

The hiring of new employees will also occur gradually, as will the increase in invested capital, if the possibilities of reducing production costs have been exhausted. And the main indicator of the correct decisions of the head of the company and his assistants, managers, is the growth of the company's profit. And since the marginal product of labor is, in fact, profit, this indicator is the main one.