One of the main objectives of any business is to increase productivity and profit. Calculating the marginal product of labor can help employers make major decisions regarding the number of employees and the productivity level of the business or company to maximize profit. And if you are interested in learning this concept, then you are in the right place.

The concept of “Marginal Product of Labor” indicates the change in the production level of a business as a result of a change in the workforce. Based on that, companies decide whether hiring extra employees will result in a boost in productivity or if adding extra labor is not worth the cost. And this can help them to maximize their profit and productivity.

This article will teach you what the marginal product of labor is and show you the formula for calculating it. This article will also explain to you the steps for calculating the marginal product of labor along with examples to help you learn the concept clearly. 

Marginal Product of Labor Formula

The formula for calculating the marginal product of labor (MPL) can be derived by dividing the change in production output by the change in input labor. Essentially, it captures the change in output resulting from a unit change in labor.

The formula can be mathematically expressed as,

MPL = ΔP ÷ ΔL

Where, 

ΔP = Change in Production/Output Level

ΔL = Change in Labor

The formula can be further elaborated as,

MPL = (P₁ – P₀) ÷ (L₁ – L₀)

Where,

P₀ = Initial Production/Output Level

L₀ = Initial Labor Unit

P₁ = Final Production/Output Level

L₁ = Final Labor Unit

What is Marginal Product of Labor?

In economics, the concept of “Marginal Product of Labor (MPL)” refers to the change in output that occurs when there is a change in labor while all other inputs remain constant. It is a metric used in economics to identify how much additional output is generated with changing labor forces.

The term “Marginal Product of Labor” reflects how adding one unit of labor such as hiring one more employee in a company changes the output of the company. And in economics, this is a very important concept. It is a measure of what the size of the workforce in a company should be in order to maximize its profits and productivity. 

It helps companies and businesses decide whether hiring additional employees will benefit the business/company or adding extra manpower is not worth the cost. Keep in mind, MPL (Marginal Product of Labor) is not always proportional to the output directly produced by the added employees. 

Almost every business and company reaches a point when hiring even one more employee will not change the productivity level at all. Furthermore, in some cases, this can lead to an overall decrease in productivity. Ultimately, there are just too many employees trying to do only a handful of tasks and as a result, productivity suffers.

How to Calculate Marginal Product of Labor?

To compute marginal profit of labor using the formula mentioned above, follow the steps given below:

Step 1: First of all, identify the initial labor unit and the initial production/output level of the company/business denoted by L₀ and P₀ respectively. 

Step 2: Secondly, find out the final labor unit and the final production/output level of the company/business which are represented by L₁ and P₁ respectively.

Step 3: In this step, you will have to compute the change in labor input i.e. ΔL. To do that, subtract the initial labor unit (L₀) from the final labor unit (L₁).

Change in Labor, ΔL = L₁ – L₀

Step 4: Next, subtract the initial production/output level (P₀) from the final production/output level (P₁). This will give you the change in production/output level (ΔP).

Change in Production/Output Level, ΔP = P₁ – P₀

Step 5: Lastly, put the values of change in labor i.e. ΔL from “Step 3”, and change in production/output level i.e. ΔP from “Step 4” into the marginal product of the labor formula mentioned above. 

Practical Examples

To better understand how to calculate the marginal product of labor, take a look at the examples given below:

Example 1

Let’s consider the case of a hypothetical company “BizKit Ltd.” for this example. Assume the company is engaged in manufacturing jet engine parts. Not long ago, the company’s management conducted a survey to understand the impact of hiring additional employees on the output level of the company. 

From the survey, they have found that the monthly volume of production increased from 100,000 units in the fiscal year 2019 to 180,000 units in the fiscal year 2020 as a result of an increase in the number of employees from 50 to 75. 

Now, find out the marginal product of labor of BizKit Ltd. for the newly hired workforce and compare the productivity level of the new workforce with the old one.

To calculate the marginal product of labor, first, we will need to find out the change in labor and the change in production level.

Here,

Initial Production Level or  P₀ = 100,000 Units

Initial Labor Unit or  L₀ = 50

Final Production Level or  P₁ = 180,000 Units

Final Labor Unit or  L₁ = 75

So, the change in the production level will be,

Change in Production/Output Level, ΔP = P₁ – P₀

      = (180,000 – 100,000) Units

      = 80,000 Units

And the change in labor will be,

Change in Labor, ΔL = L₁ – L₀

          = 75 – 50

          = 25

Therefore, the marginal product of labor for the company is going to be,

MPL = ΔP ÷ ΔL

         = 80,000 ÷ 25

         = 3,200 Units per Labor

The productivity level of the company for the fiscal year 2019 is calculated using the following formula,

Productivity Level in the Fiscal Year 2019 = P₀ ÷  L₀

                      = 100,000 ÷ 50

        = 2,000 Units per Labor

And the productivity level in the fiscal year 2020 can be calculated by using the following formula,

Productivity Level in the Fiscal Year 2020 = P₁ ÷  L₁

                      = 180,000 ÷ 75

        = 2,400 Units per Labor

So, in this example, we can see that the marginal product of labor of the new employees is 3,200 units per labor. And this has resulted in an increase in the productivity level from 2,000 units per labor in the fiscal year 2019 to 2,400 units per labor in the fiscal year 2020.

Example 2

Let’s consider the case of another hypothetical company “Kanada Inc.”. It is an LED bulb manufacturing company that launched only a year ago. Since its launch, the company has increased its workforce in a steady manner. The workforce and production volume of the company for the first six months since they launched their business operation is given in the following table.

Month	No of Labors	Production Volume (Pieces)
May	200	150,000
June	250	190,000
July	300	240,000
August	400	300,000
September	450	330,000
October	500	350,000

Now, find out the marginal product of labor (MPL) for this company at the end of each month.

The marginal product of labor (MPL) formula is,

MPL = (P₁ – P₀) ÷ (L₁ – L₀)

Where,

P₀ = Initial Production/Output Level

L₀ = Initial Labor Unit

P₁ = Final Production/Output Level

L₁ = Final Labor Unit

So, for the month of June, the marginal product of labor will be,

MPL_June = (P_June – P_May) ÷ (L_June – L_May)

= (190,000 – 150,000) ÷ (250 – 200)

= 800 Pieces per Labor

Similarly, for the month of July, the marginal product of labor will be,

MPL_July = (P_July – P_June) ÷ (L_July – L_June)

= (240,000 – 190,000) ÷ (300 – 250)

= 1,000 Pieces per Labor

For August, the MPL will be,

MPL_August = (P_August – P_July) ÷ (L_August – L_July)

  = (300,000 – 240,000) ÷ (400 – 300)

  = 600 Pieces per Labor

In the case of the month September, the marginal product of labor will be,

MPL_September = (P_September – P_August) ÷ (L_September – L_August)

        = (330,000 – 300,000) ÷ (450 – 400)

        = 600 Pieces per Labor

 And finally, for October, the MPL will be,

MPL_October = (P_October – P_September) ÷ (L_October – L_September)

    = (350,000 – 330,000) ÷ (500 -450)

    = 400 Pieces per Labor

Importance of Marginal Product of Labor

In economics, the marginal product of labor concept is extremely important. It can help businesses and companies to take major decisions regarding the amount of workforce and productivity. But bear in mind that the concept of marginal product of labor is subjected to the law of diminishing marginal returns.

As a result, the marginal productivity will ultimately decrease after a certain level. And happens because of various operational shortcomings. The value of the marginal product of labor can even be negative. This means even if companies hire an additional workforce at this point, their total production will decrease with it.

Conclusion

In this article, I’ve briefly explained the concept of marginal product of labor, showed you the formula and discussed how to calculate it with several practical examples. After reading this, hopefully, you have a clear idea about how you can calculate it and apply it in real life. 

Thanks a lot for stopping by. Have a great day.