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Marginal Product of Labor

Definition: Marginal product of labor is an economics term that shows the additional production a company experiences by adding one unit of labor. In other words, it reflects the additional units produced when one unit of labor, like one more employee, is added to the company.

This is an important concept to management because it measures the optimal amount of labor that should be used to maximize productivity and profits. Thus, it helps them decide whether the company should hire more employees or if adding additional employees is not worth the cost.

Every company reaches a point where adding another person will either not change productivity or it will actually decrease the overall productivity of the team. Eventually there are too many people trying to do too few tasks and productivity suffers.

Letís look at an example.

Example

Bob is the hiring manager of a startup manufacturing company that makes dolls. In order to make the dolls, Bob must decide how many workers to hire. How would he decide when enough is enough?

Couldnít he simply hire more and more workers to create more dolls? In theory he could, but this is not practical due to the marginal product of labor. Letís say for the first few hires, Bob experiences a positive MPL: the first worker adds five dolls, the second worker adds three dolls, and the third worker adds one doll to overall production. Now the company is producing nine dolls. However, when Bob hires the fourth worker, he notices something unexpected: the company is now producing only seven dolls.

How could this happen? He looks at the hiring dates and production levels, and realizes that when he hired the fourth worker, production dipped. Now, he looks onto the manufacturing floor and sees that the fourth worker is mulling about and waiting for things to do while the other three workers are steadily working. There simply isnít enough work for four people and the fourth hire is actually disputing the first three.

This is an example of negative MPL. Adding this additional worker does not make sense, as he doesnít add to production. Marginal productivity of labor is a great tool that allows business owners to see how effective their labor is being, and helps them realize the most efficient number of workers.

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