What Is The Impact Of Diminishing Marginal Returns On Labor?

by Redeeming Riches on April 2, 2012

In the field of economics, the term ‘marginal utility’ is used to describe the added (or diminished) benefit received by adding or subtracting one unit of consumption.  For example, if you are eating lunch, one sandwich might bring you 100 units of ‘satisfaction’.   If you have two sandwiches, your level of satisfaction might jump again by 100.  If you eat three sandwiches, your unit of satisfaction might only go up by 50 since you’re probably getting sick of seeing sandwiches. By the 4th or 5th sandwich, the marginal utility or usefulness of the next sandwich is close to 0 since you are already full.

Understanding the concept of diminishing marginal returns when it comes to labor is also important.  The idea is the same – for every worker you add to a job, you’ll either experience an added or diminished benefit.

If you’re a business owner, this is a crucial calculation for you to make.  Hire too few workers and you won’t have enough hands to cover the demand.  Hire too many workers and you’ll be paying for additional labor that you really didn’t need.

When you have diminishing marginal returns with respect to labor, you’re overall output per labor unit shrinks.  Keeping track of these changes can be done in a simple spreadsheet.  For every unit of labor that you hire, document how much that impacts your production.  If the increase in production starts to decline, you’ll be able to see it in the graphic representation of the spreadsheet.

Remember, it’s unlikely that you’ll see a negative return right away.  Diminishing marginal returns is a matter of watching your production increase at a slower rate than it had been increasing previously.

Have you recognized diminishing marginal returns on labor in your line of work?

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