The Top 3 Impacts of Diminishing Marginal Returns on Labor

by Redeeming Riches on October 17, 2014

diminishing-returnsDiminishing Marginal Returns on Labor

There are certain rules in economy that play out correctly every time. There are others that don’t always give you the return on your investment that you expect from your business.

When we look at the economy of things, we’ll frequently hear the term diminishing marginal returns or marginal utility. Knowing and understanding both the concept and the impact of diminishing marginal returns on labor is imperative in the business arena. The idea is, according to the experts, the same when considering employees. For every new employee that you add to a task, you’ll either get an additional benefit or you’ll get a diminished benefit.

In business it’s imperative that you can calculate the depth of the losses that you have and be able to determine what the top losses are going to be. Diminished marginal returns  as regards labor are unique in that there are multiple losses that you can see, but in some cases, knowing what they are and expecting them can help you to mitigate them.

For example, the top impacts that you can expect are:

The top impacts would quite likely be that as there is an inverse association between the cost of production and the amount of the return, so too is there an inverse relation between the number of employees and the amount that they produce.

When there are fewer employees, each employee works slightly harder in order to produce the quota that the company desires. When additional employees are added, due to the very nature of the addition, more cost is incurred by the company in both wages and benefits.This lowers the amount that the company takes in.

In addition, due to the fact that there are more to share in the work, the labor takes less time and the average worker will slightly draw back, doing a little less because others are sharing the labor.

The other employees tend to–because of the fact that there are more employees to share in the labor–produce less. This means that the company has incurred a greater cost and a lower production rate even though they brought on additional staff in order to add to production.

When the company in question is hiring more, paying more out in order to add to their production, in some cases the reverse becomes true. The workers produce less, the cost of labor is more and the company does not enjoy the anticipated growth because the funding for that growth and expansion is not there. It stands to reason that when financial gain is less than anticipated, company growth is stalled.  What does the slowed or stalled growth of a company do? It stands to reason that there are consequences but they may not be entirely the consequences that we expect.

In some cases, the stalled growth can lead to a layoff of workers lowering the cost of operation, lowering the number of staff who are actively engaged in the work, but–conversely and surprisingly, raising the production of the company.

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