Why Hiring More Staff Doesn't Always Boost Profits: An Economic Perspective

From restaurant kitchens to the craft business Rozu Craft, the law of diminishing returns serves as a reminder for business owners to calculate carefully before recruiting.

Many business owners believe that more workers equate to greater production. While this can be true, it only applies up to a certain point. Beyond that threshold, each new worker produces less additional output than the previous one, while labor costs continue to accrue.

In economics, this phenomenon is known as diminishing marginal product or the declining marginal product.

The marginal product of labor is the additional output generated when one extra worker is added to the production process, assuming other factors of production—such as machinery, tools, and workspace—remain constant.

This final assumption is often overlooked when a business is busy and owners are tempted to increase their workforce.

The Crowded Kitchen

A restaurant kitchen is an easy example to visualize.

When there are only two workers, adding one or two chefs usually has an immediate impact on production. Task division becomes clearer: some prep ingredients, others cook, and some plate the dishes. Orders are completed faster.

Problems begin to arise when the number of workers continues to increase while the kitchen size and the number of stoves remain the same.

Space becomes cramped, queues for the stove grow, and coordination between employees becomes more complex. Consequently, the additional output from each new worker shrinks.

If the kitchen is too crowded, the additional production generated by a new worker may even approach zero or, in certain conditions, hinder the work process.

A Simple Calculation

The following figures are for illustrative purposes only to explain the concept, not actual data from a restaurant or Rozu Craft.

Illustration of production in a kitchen with a fixed number of stoves and workspace.

The table shows that total output is still increasing. However, the contribution of the fifth and sixth workers is much smaller than that of the third worker.

If the wage cost for each worker is relatively the same, the decision to add a sixth worker needs to be considered more carefully because the additional production is only one portion per hour.

In other words, an increase in the number of workers does not always result in a proportional increase in profit.

The Story from Rozu Craft

The owner of Rozu Craft describes a similar pattern based on their experience managing the business.

According to the owner, adding workers in the early stages can speed up work because each employee can concentrate on their respective tasks. However, the condition of the workspace, the number of tools, and available facilities determine whether that productivity gain can be sustained.

When the number of workers increases while space and tools remain the same, the use of equipment must be rotated to keep the production process efficient.

While this method can reduce the need for investment in new tools, it still creates waiting times between workers.

The owner of Rozu Craft has also experienced conditions where adding workers did not immediately increase production significantly. One reason is that new workers require experience and an adaptation process.

The hope that production will immediately double is not always realized. A new worker's productivity usually develops with experience and working hours.

In determining the number of workers, the owner of Rozu Craft also considers the level of consumer demand.

When demand increases significantly, for example, doubling, adding workers can be an option. However, if the increase in demand is relatively small or only temporary, overtime can be used as an alternative.

The scheme applied involves five permanent employees and two reserve workers who can be called upon when production volume increases. If production costs can be suppressed, the increase in profit is also expected to benefit employees, including through bonuses.

This approach is in line with the principles of production efficiency, although there are several things that still need to be considered.

Overtime, for example, is not automatically cheaper because the hourly cost can be higher than normal working hours. Its advantage lies in flexibility, as the company does not have to bear the fixed costs of new employees when demand spikes are only temporary.

On the other hand, continuous use of overtime can cause fatigue and potentially lower worker productivity.

Why Is the Result Not Always Double?

The basic model of marginal product usually assumes that workers have relatively equal abilities. In practice, this is rarely the case.

New workers need time to learn workflows, understand the use of equipment, and adjust to the company's production standards.

Therefore, a new worker's contribution in the early stages may be lower than their contribution after gaining experience over time.

The decision to recruit workers should take into account this training and adaptation period.

There is also a common fallacy: the assumption that if the number of workers doubles, production will automatically double as well.

This assumption assumes the marginal product of labor is always constant.

In reality, the theory of diminishing marginal product shows that if other factors of production such as machines, tools, and workspace do not increase, the additional production from each new worker tends to decrease after reaching a certain point.

This means that worker experience is not the only factor determining productivity. Increasing worker skills is also not always enough if the main obstacle lies in the capacity of tools or production space.

Options When Demand Rises

Adding permanent employees is not the only solution when consumer demand increases.

Based on business practices and production economics principles, business owners have several options that can be adjusted to their respective conditions.

This summary is a general consideration and needs to be adjusted to the conditions of each business.

There is no single option that is always superior in every condition.

The decision depends heavily on whether the demand spike is temporary or permanent, and whether the production bottleneck actually lies in a labor shortage or in limited tools and space.

When Should You Add Workers?

The basic principle is to add workers as long as the value of the additional output produced by that worker is still equal to or greater than the additional cost of hiring them.

In economic concepts, the value of additional output can be calculated by multiplying the marginal product of labor by the value or price of the output produced.

Simply put, a company will try to find the number of workers where the benefits of an additional worker can still cover the additional costs incurred.

Before recruiting, business owners can consider several important questions:

• Are the production tools and space still sufficient for one additional worker?

• Can the use of tools be managed by rotation without hindering production?

• Is the increase in demand permanent or just temporary?

• Does the new worker need training time before reaching the expected productivity?

• Is the main business constraint really a lack of labor or limited production facilities?

These questions are important so that the decision to add employees is not based solely on the volume of orders, but also on calculations of productivity and costs.

Conclusion

Production efficiency is not just a matter of increasing the number of workers.

Productivity depends on the balance between labor, equipment, production space, worker skills, and the level of consumer demand.

For business owners, understanding the point at which the marginal product of labor begins to decline can be the basis for determining whether the company needs to recruit new employees, add equipment, expand workspace, use reserve labor, or simply reorganize the production process.

Ultimately, the decision to add labor should not only answer the question, “Can production increase?” but also, “Is that additional production worth the cost incurred?”

Keywords: marginal product of labor, diminishing marginal product, managerial economics, labor, MSME, Rozu Craft, production efficiency