The Marginal Product of Labor and the Production Function
The "marginal product of labor" (MPL) indicates the change in output as a result of adding an additional unit of labor, whereas the "production function" provides the maximum output that Philip Morris can create for each defined combination of inputs. The rule of diminishing returns, however, applies to MPL, so adding more labor won't result in bigger profits because the MP will start to fall. Since using more labor with a fixed amount of capital results in a situation where the amount of capital accessible to each worker decreases, the productivity of extra workers also decreases, the MPL for Philip Morris' production function will begin to decline. Therefore, Philip Morris production experiences diminishing marginal returns to labor in the short run.
The Value of Marginal Product
The “value of marginal product” (VMP) refers to the increase in the employer’s total revenue from selling the additional output produced by a small increase in labor (Dorman, 2014). VMP for labor is the “MPL multiplied by the price of the output”, and for a profit maximizing firm such as Philip Morris, the VMPL is equal to the wage. It is important to note that the VMPL diminishes as labor rises because the price of output is constant. The effect of the diminishing MPL (an additional worker contributes less to production) is to reduce the VMP for Philip Morris given the fact that the price of output is constant.
Philip Morris' Labor Demand Curve
The VMPL for Philip Morris represents the firm's labor demand curve, and since it is a profit maximizing firm, VMPL is equal to the wage. However, if the VMPL increases such that it is greater than the wage rate, the demand for labor increases since the additional labor increases the firm’s profits. On the other hand, when the VMPL decreases, either as a result of fall in prices or productivity, the firm’s demand for labor decreases since any additional hours decrease the profits. Philip Morris' demand of labor could shift as a result of changes in output price and technological changes (Karabarbounis & Neiman, 2013). An increase in the price of its cigarettes results in the labor demand curve shifting to the right since the firm requires more labor at each wage structure. Also, the emergence of new technology to revolutionize the harvesting of tobacco would shift the demand to the left since fewer workers are now required. Regarding supply of labor, immigration is a key event that would cause a change to the right since the number of employees will increase. The effect is a downward pressure on the wages, making it more attractive for the firm to get additional workers, and consequently, both the MPL and VMPL diminish.
Factors Influencing Worker's Wages
The worker’s wages must balance between the demand and supply for labor and as pointed out earlier, is equal to the VMPL. Minimum wage laws, the influence of trade unions, and the efficiency wage theories are possible reasons why a worker’s wages might be above the level that balances supply and demand. Regarding the minimum wage, Philip Morris might be forced to pay the inexperienced workers a minimum wage higher than the equilibrium level (Schmitt, 2013). The trade unions demand for higher wages ignores the balance of demand and supply. The firm will get into wage agreements where it promises to give raises above the equilibrium level, and this results in serious conflict. For instance, the workers in South Africa in 2016 rejected the 8% pay increase and also held protests that the firm fails to recognize the trade unions. Thirdly, the company may pay higher wages as a result of the efficiency wage theories that argue that worker productivity increases with rises in the wages (Weiss, 2014). Wages are a key motivator, and therefore, Philip Morris has to understand that decreasing the wages will have the unwanted consequence of falling productivity.
Government Initiatives
An example of the government’s initiative in addressing income equality and poverty is designing a relatively high minimum wage (Hoeller, Jourmad, & Koske, 2012). However, an increase in the minimum wage would increase the company's wage costs and result in less demand for labor. The second government initiative seeks to reform the education sector to grow the number of graduates from higher education. The effect would be an increase in the supply of skilled labor.
References
Dorman, P. (2014). Labor and Employment. In Microeconomics (pp. 339-367). Springer Berlin Heidelberg
Hoeller, P., Jourmad, I., & Koske, I. (2012). Reducing Income Inequality While Boosting Economic Growth: Can It Be Done. Economic Policy Reforms, 181-202
Karabarbounis, L., & Neiman, B. (2013). The global decline of the labor share. The Quarterly Journal of Economics, 129(1), 61-103
Schmitt, J. (2013). Why does the minimum wage have no discernible effect on employment?. Center for Economic and Policy Research, 22, 1-28
Weiss, A. (2014). Efficiency wages: Models of unemployment, layoffs, and wage dispersion. Princeton University Press
