Labor and Marginal Product
As the CEO of a company, you have a meeting with your operations manager. He wants you to let the company hire as many people as possible. You think it is not a good idea.
1-Explain why the new staff would not be as productive as before.
Employing many employees in the firm more than needed decreases the productivity of the employees since there will be hidden labor. If there are more than enough workers in an organization, some workers will not be fully utilized, and their contribution to production is not maximized. Further, hiring new employees means that the firm will incur other extra costs, such as the cost of hiring, training, and orientation. This cost increases the total cost of production, which may grow more than the total revenue. New employees require more training to acquire the specialized skills needed to perform the company job description. The recruits lack the experience to drive the company towards its objectives, and the firm should retain its previous workers. Hiring more labor in the company can be explained through the law of diminishing returns, which states that adding more workers in the firm as other factors of production kept constant increases the total output until a certain point when it starts to decrease. Hiring more employees passed a certain where their production is less than the cost of maintaining them is not economically desirable for a company. The CEO must ensure that the marginal product of the employed workers is not lower than the work done. Don't use plagiarised sources.Get your custom essay just from $11/page
2-Use a graph to show how the benefits of hiring new staff will gradually be less than the cost of adding them to the team. Make sure to explain what this graph is showing.
The graph above shows a correlation between marginal products and labor input. From the graph, it can be noted that for the first two workers added, and there is an increase in the marginal product since every additional worker contributes to total production. An increase in marginal product explains the positive slope of the MPC. After the third employee is added, there is a decline in the marginal product as each worker contributes less to the total production than the previous worker. This results in decreased marginal product up to a point when it becomes zero and then negative.
Consequently, the marginal product curve passes across the horizontal axis. The company should be concerned about the new hiring since the additional workers should generate output that is more than the cost of hiring the workers. The manager needs to consider the factor that the productivity of one extra work should be more than the cost of hiring that particular worker. The firm also needs to consider the demand for their products, and only if the demand for their products is enough, then should it consider hiring new workers to generate more revenue above the production cost. The firm needs to ensure that the marginal product is more than the cost of recruiting more employees.
3-What is the formula to assess if we should go ahead and hire new staff, or should we stop hiring?
Hiring new employees decision should be based on MRPL=MR X MP and where MR=WR
Where,
MRPL=marginal revenue product of labor
MR=marginal revenue
MP= marginal product
WR=wage rate
For firms that maximize profit, if the marginal revenue is lower than the wage rate, then the firm should not hire, but if the wage rate is less than the marginal revenue, then the firm can hire more workers.