15.4 : The Marginal Product of Labor I

The marginal product of labor, or MP_L, measures the increase in output resulting from an additional unit of labor. While doing this analysis, it is assumed that the other inputs are kept constant. For example, a firm may increase the number of workers from three to four. Its output rises from 300 units to 370 units. The marginal product of the newly hired labor is 70 units. This is the difference between the output with four workers (370 units) and the output with three workers (300 units).

Diminishing Marginal Product of Labor

The concept of diminishing marginal product of labor implies that as the number of workers increases, the marginal product of each additional worker decreases. For example, the firm may hire another worker, increasing the number of workers to five. If the output rises from 370 units to 420 units, the marginal product of the fifth worker is 50 units. This additional output of 50 units on the hiring of the fifth worker is less than the 70 units added to the output on the hiring of the fourth worker.

Economic theory explains that, when all other input factors are held constant, the additional output from each new worker decreases continuously. In other words, the output added by hiring a new worker is smaller than the output added by the previous worker. This diminishing pattern of marginal product continues as more workers are employed. It is important to note that diminishing MPL does not result from differences in worker skill or quality. All workers are assumed to have identical skills and productivity levels.For example, when a new worker is added to a fixed amount of equipment, each worker has less access to the equipment. This can decrease the MP_L when adding an additional worker.