How Much Labor Should Be Employed in the Absence of Other Variable Input? A Practice

Abstract

The aim of this research article is to determine how we will use one variable input more optimally, and how much labor should be hired to increase the level of output. In the short run a firm can increase output only by using more of the variable inputs together with fixed inputs (plant and equipment). So we have collected data on total revenue product of labor and total resource cost of labor from Sial clothing mills from Jan 2007-Dec 2009. We have run a regression analysis on total revenue product of labor and total resource cost of labor against considering labor as an independent variable. We have estimated two equations, one is total revenue product of labor and the other is total resource cost of labor. By putting different units of labor in these two equations, we have found that 16.44 units of labor is an optimal point of labor where marginal revenue product of labor is equal to marginal resource cost of labor. If firms hire more labor than 16.44, the law of diminishing returns operates, meaning if we hire more labor beyond optimal level then productivity will decline.