How to Determine Marginal Product of Labor

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The marginal product of labor, or MPL, is an effective way for businesses to determine how worthwhile it is to hire new employees. By tracking the output a business creates based on the amount of employees it pays, a business owner can maximize his profit and efficiency. MPL is simple to calculate and highly useful for any business owner, although it's easiest for small businesses owners to determine.

Keep Accurate Records

Keep daily records for your business of output and number of employees. For example, if your business is a microwave factory, your output would be the number of microwaves your factory makes in one day.

Average Daily Outputs

Average your daily outputs together based on the number of employees. In other words, find the average for all the days your business had one employee, all the days your business had two employees, etc. Make a chart with these averages: one side should have number of employees and the other side should have average daily output based on that number of employees.

Apply the Marginal Cost of Labor Equation

Calculate MPL by measuring the change in output for each new employee. For example, say that the microwave factory averaged zero microwaves a day with zero employees, 100 microwaves a day with one employee, 200 microwaves a day with two employees, and 250 microwaves a day with three employees.

Based on these numbers, the MPL for one employee would be 100 (100 minus 0), MPL for two employees would be 100 (200 minus 100), and MPL for three employees would be 50 (250 minus 200). Add these numbers to the chart that you made in the last step.

Find the Efficiency Point

Find the point of diminishing marginal returns to make your business more efficient. This is the point when MPL becomes negative. In other words, it's the point when adding employees makes output decrease, not increase. Think back to the microwave factory: maybe the assembly line is only long enough for 10 employees, and when the owner hires an eleventh employee, he just gets in the way and makes the output decrease.

By keeping a good record and calculating MPL for each new employee, the owner would notice that MPL became negative (i.e., output decreased) after hiring that employee. He would know to lay off the eleventh worker and stick with ten workers.

Determine the Effectiveness of Workers

Use MPL to determine the effectiveness of each new worker. For example, if the fifth worker at the microwave factory only had a low MPL while the fourth and sixth workers had high MPLs, the owner would know that the fifth worker he hired was underperforming compared to the others. He could help that worker improve or find a new worker to replace him.

Compare Labor Costs to Revenue

Compare labor costs to revenue from output to make your MPL figures even more useful. If MPL multiplied by the revenue for each output is larger than the labor cost for each employee, then you're making a profit; otherwise, you need to refigure your business model. For example, if each employee incurred daily labor costs of $100 and the revenue for the business from each microwave was $10, each employee would need an MPL of 10 for the owner to break even.

If employees had a lower MPL, the owner would want to make them more productive, increase revenue from the microwaves or decrease labor costs.

Tips

  • Try to keep other factors constant. If there's an accident on the assembly line, for example, output would temporarily decrease. Don't use output numbers from that day because your results will be skewed.

References

About the Author

John Smith has been working at a Wisconsin newspaper as a reporter and editor for more than four years, focusing on investigative articles in local government. He will begin studies at a university in New York City in 2011.

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