Reference no: EM132408098

Based on: The management of Morris Industries is terminating a new employee. The action stemmed from documented evidence supplied by the firm's accounting department that this new employee did not add as much to the firm's overall output as a worker hired two weeks earlier.

The statement:

This is not the correct rule to be followed for hiring labor units especially additional labor unit. the general rule to be followed is the equality between the value of the marginal product of labor and the wage rate.

In simple terms, the market value of the additional product added by the additional hired labor unit should be greater than or equal to the compensation made to that labor unit. The accounting department is making a mistake by considering the marginal product only. It is natural that because of the diminishing marginal returns, marginal product of the newly hired worker would be less than the marginal product of the previously hired worker because marginal product continues to fall as more and more labor units are hired.

Therefore, this newly recruited worker should not be fired merely by comparing his marginal product with the marginal product of the previous worker. The market value of this additional product should be computed and compared with the compensation made to this newly recruited worker. In case the market value is less than the compensation, then this worker can be fired otherwise not.

Do you agree or disagree with the statement that I mentioned above? Why?