Marginal Product of Labour

… a core concept in Economic Analysis and Atlas102

Concept description

Alex Tabarrok (reference below, video on right) defines the marginal product of labour is the increase in a firm’s revenues created by hiring an additional labourer.

NOTE: Some authors use the term marginal revenue product of labour (measured in units of currency) synonymously with marginal product of labour, while others  use marginal product of labour as a quantity of output that must be multiplied by the marginal revenue of output to equate to the marginal revenue product of labour (see Marginal Revenue Product of Labour).

Determination of wages

Tabarrok describe the demand for labour as a Derived Demand (derived from the marginal product of labour):

• The marginal product of labour declines as more labour is used
• Firms will hire as long as Wage < marginal product of labour (MPL)
• This means that the firm’s Demand for Labour = MPL

Individual and market supply of labour

An individual’s supply of labour can have a backward bending supply curve over some portion of the curve if that person “buys leisure” by choosing to work fewer hours as income increases. However, the market supply curve will be upward sloping.

Why do janitors earn more in the U.S. than in India?

Tabarrok notes that janitors earn more in the U.S. than in India, not because janitors sweep more floor area per hour in one country than another but because:

1. There is a higher demand curve for janitors in the U.S. because an American office building is more productive (more and better capital, office workers more productive) and therefore it is more valuable to keep an American office clean than an Indian office clean, and
2. There is a lower supply curve for janitors in India because India has more low skilled workers than in the U.S.

Practice questions

From http://www.mruniversity.com/node/301755, accessed 8 May 2016.

1. Determine whether the following statements are true or false. The marginal product of labor is
   1. the amount of extra profit that a firm will earn if it hires one more worker 
   2. the amount of extra revenue that a firm will earn if it hires one more worker
2. By definition, a labor supply curve cannot have a negative slope.
   1. True 
   2. False
3. State whether you think Joe’s labor supply will tend to increase or decrease as a result of the following change: While in Las Vegas for the weekend, Joe wins a $1 million jackpot.
   1. Joe will work more
   2. Joe will work less
4. One way to think about wages for different jobs is to see it as another application of the law of one price. The basic idea is that the supply of workers will keep adjusting until jobs that need the same kinds of workers earn the same wage. If similar workers earned different wages, then the workers in the low-paid jobs would reduce their labor supply, and the workers in the high-paid jobs would face more competition from those low-paid workers. Let’s look at 100 computer programmers who are trying to decide whether to work for one of two companies: Robotron or Korrexia. To keep things simple, assume that both companies are equally fun to work for, so you don’t need to worry about compensating differentials here (featured in the video devoted to compensating differentials). The marginal product of labor (per additional hour of work) is listed in the table below. At a wage of $80 per hour, the total demand for workers would be 
   1. 50 workers
   2. 60 workers
   3. 70 workers
   4. 100 workers
5. The programmers in this town are going to work at one of these two places for sure: Their labor supply is vertical, or in other words perfectly inelastic, with supply = 100. So, what will the equilibrium wage be? Hint: the numbers may not work out exactly—so use your judgment to come up with a good answer.
   1. $50 dollars per hour
   2. $55 dollars per hour
   3. $60 dollars per hour 
   4. $65 dollars per hour
6. About how many programmers will work at Robotron at this price? Again, use your judgment to come up with a good answer.
   1. 55 workers
   2. 60 workers
   3. 65 workers
   4. 70 workers
7. Suppose 50 more programmers come to town. What will the wage be now?
   1. $15 per hour
   2. $20 per hour
   3. $25 per hour
   4. $30 per hour

Source

Alex Tabarrok, The Marginal Product of Labor (10-minute video), Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/labor-economics-marginal-product-labor, accessed 8 May 2016.

Atlas topic and subject

Labour Markets, Transfers, and Personal Taxes (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Page created by: Ian Clark, last modified on 18 April 2016.

Image: Alex Tabarrok, minute 0:15 in The Marginal Product of Labor (10-minute video), Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/labor-economics-marginal-product-labor, accessed 8 May 2016.