The marginal product of labor (MPL) is the indicator of a substantial increase in a firm’s or economy’s output. In other words, the term explains the shift in production that stems from increasing the number of labor units, such as hiring new workers. When the demand for goods is high, companies can hire new workers as long as their salary is lower than MPL.
Companies care about the marginal product of labor because of the decisions to hire workers usually relies on whether the extra costs produced by the hiring would be costlier than the indicator itself. Calculating the measurement depends on the production function of a company or economic conditions overall, which means that output, capital, and labor should be considered. The marginal product of labor formula is the following:
MPL = (α-1) x A x Kα x L–α = α x Y/L
The formula represents the derivation from the Cobb-Douglas function in regards to labor when capital remains constant. Y is the total production, which means that it refers to the real value of a firm’s or economy’s production. The marginal product of labor graph is the following: