A firm is willing to hire a worker when the worker increases the firm’s revenues more than the firm’s costs

Marginal product of labor: the increase in a firm’s revenue created by hiring an additional laborer

• The increase in costs created by hiring an additional worker is the worker’s wage

A firm is willing to hire a worker when the marginal product of labor is greater than the wage

Ex: when the cavaliers signed Lebron James, they won more, their attendance increased, and they were able to sell more merchandise

• His salary may be high, but so is Lebron’s marginal product

Ex: McDonald’s considers marginal product when the company hires people to run the restaurant and keep it looking clean

• No one wants to eat in a restaurant that’s unclean

  • Cleaner restaurant increases profit

• At some point, additional cleanliness costs more than it’s worth

  • To maximize profit, McDonalds will hire janitors as long as the increase in revenue from hiring another janitor exceeds the janitor’s wage

• How many janitors will McDonalds hire?

  • Depends on the wage

  • When the wage falls, they hire more janitors and assigns them to less important tasks

  • As the wage falls, so does MPL

• The wage and the marginal product of labor will always be close together because McDonald’s will keep hiring workers as long as the MPL is greater than W

The marginal product of labor usually declines as more labor is hired

• If there is one janitor, they’ll focus on the most important tasks so the marginal product of labor is high

• As they add janitors, each janitor is assigned to a less important task, so the marginal product of labor falls

What determines the wage?

• Many firms demand janitors, so wage of janitors will be determined by the market demand and the supply of janitors

• At a high wage, only some firms will demand janitors

  • As the wage falls, more and more firms will demand janitors

  • Market demand for janitors is downward-sloping