The Demand For Labor and The Marginal Product of Labor

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