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

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