Whatever the company does, it is in any case working for the result. And this result is the manufactured products. A product of production may be either material or non-material. At a machine-building plant, machines are used as a product of production, sweets at a candy factory, the number of patients served in the medical field, and the number of graduates at a university.
By production of products various resources are used. This is money, equipment, land, minerals, human labor. Labor is also a product. It is divided into general, medium and marginal. The marginal product of labor is an additional expansion of production resulting from its increase by one unit. At the same time, 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 the efficiency (productivity) 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. So their work is more efficient.
What actually reflects the marginal product of labor?
The marginal product of labor is equal to the increase in the volume of production divided by a variable resource. In other words, this indicator makes it clear how much productivity increases due to the use of a new variable resource for the same unit of time. For example, a new resource may be a new workforce, equipment, or technology.
How many workers to hire
For any company striving for successful work and development, it is important to determine how many working people are necessary for the most effective work. It would seem that the more workers, 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 magnitude 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, which takes into account at least two variables of the resource — labor and capital.
What does salary depend on?
With a fair and correct calculation, the head of the company can determine the highest possible wage for hired employees, while maintaining growth in profits of his company. Wages and marginal products of labor are interdependent concepts. When the enterprise maintains the optimal ratio of variable resources to the number of labor resources involved, then productivity increases. 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 the attraction of new units of labor will ultimately lead to diminishing productivity, which subsequently affects the wages of the personnel as a whole.
Everything is closely related to formulas and calculations
Considering that the marginal product of labor is additionally developed products by attracting an additional labor unit, it is also necessary to take care of investing additional capital in the production. A simple example: if a company invests in the purchase of 100 tons of meat for the production of sausages, and 100 employees produce products, then with an increase in staff by 50 jobs, the company will reduce its profit due to the need to pay additional wages to new employees.
And the number of products 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. Consequently, increase invested capital. But so that the marginal product of labor and capital invested in production have the proper ratio. That is, an additional amount of manufactured products should bring a company income that exceeds the invested capital costs.
Interesting fact
Of course, any employee wants to get more salary at work. First of all, money is needed to satisfy material needs. By working more, a person receives 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 employee prefers leisure rather than work. And he no longer strives for greater productivity in the process of fulfilling his duties. Thus, with wage growth, the income effect is in conflict with the substitution effect.
Not at a loss
When determining the optimal amount of labor involved, it is worth considering all available indicators. This is 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 expenses that are inevitable with the need to hire him.
And here there are such concepts as the marginal product of labor in monetary terms and the marginal product of labor in physical terms. First of all, labor costs are taken into account. These are costs for the enterprise. And this wage 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 does not have the right to establish labor remuneration in excess of the revenue that brings the employee's labor, or equal to it.
Features and the need 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 increase. But there is another way: without expanding the staff, the company invests additional costs in the modernization of production.
By updating equipment, thereby increasing labor productivity, the company ensures profit growth.
The marginal product of labor in monetary terms shows how much the total income of the company has grown when using the same labor units using advanced modern equipment. With the correct calculation, the cost of equipment will pay off for a certain period of time and begin to bring net profit. And this is more profitable than attracting new employees, the costs of which remain unchanged or even grow.
The ratio of labor to capital income
So, the marginal product of labor is additional product. It is obtained using additional labor units. And the marginal product of capital is additional goods and services obtained as a result of additionally invested funds. And the company is interested in procuring new technologies until the marginal product equals the real price of capital. The company will receive economic profit when it pays for all stages of production, there will also be “money from above”. If we look more broadly, national income as a whole is then distributed among workers 'income, capital owners' income, and economic profit.
Interesting fact
One of the American senators - Paul Douglas - in 1927 thought about a strange phenomenon. The national income indicator does not change over the years, workers and businessmen alike enjoy the results of increased production and a progressing economy. The senator wanted to find out the reason for the constancy of the shares of production factors and turned to the famous mathematician Charles Cobb for calculations. So the well-known Cobb-Douglas production function was born, confirming that the ratio of labor to capital income is constant. 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.
Manufacturing flexibility
A competent leader will always find the perfect combination of production factors in order to increase profits and reduce costs of the enterprise. Recall that the marginal product of labor is closely related to the amount of investment used. With an increase in the 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 to increase the number of manufactured services and goods. It is more important that these products 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 volume of the used resource. Search and find markets for the sale of goods, to be able to negotiate and introduce competitive products and services - this is the task of the head of the company and his assistants.
Diminishing performance
There is such a thing as the law of diminishing productivity. It is put into 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 makes a profit, but then starts to decrease from some point. Thus, at first there is an increase in the marginal product of labor, and then this value is reduced. Why it happens?
At a time when labor costs are low and capital is still unchanged, the head of the company decides to increase units of labor. And due to this, profit increases. But when there are a lot of workers, and the invested capital remains the same, some of the employees work inefficiently, and then the company's profit falls.
A simple example: 10 people work on picking potatoes. But then the eleventh worker comes, but the volume of production does not change with his arrival, since the land is the same, the yield is almost the same. In this case, as a rule, without reducing the staff, the company introduces technological improvements, and the volume of output increases again. That is, on the same land, you can grow a richer crop using the latest technology. Then the cost of the wages of the eleventh employee will be justified by the increased profit of the company.
Work only with profit
So, marginal labor productivity and marginal product of labor are interrelated concepts. And they mean an increase in production through the use of an additional unit of labor. The head of the company takes into account all factors of production when drawing up short-term and long-term plans. Tries to flexibly approach the improvement of 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 right decisions of the head of the company and his assistants, managers, is the growth of profit of the enterprise. And since the marginal product of labor is essentially profit, this indicator is the main one.