The marginal revenue productivity theory of wages

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As a rule, companies don’t stop hiring when they have the people they need. Companies stop hiring when it becomes impossible to squeeze a marginal profit out of a new hire.

If adding another person to the sales team costs you about $100,000 a year (including overhead), and nets you $125,000 in additional sales, then that hire represents an extra $25,000 in revenue you otherwise would not have had.

The marginal revenue productivity theory of wages, imperfect as it is, explains quite a few things about the corporate world.

It explains why the computer age hasn’t really increased our productivity by all that much, why we’re still working 5 days and 40 hours every week. We just keep hiring people that are less and less productive for jobs that are less and less important, beyond what makes sense organizationally, as long as it continues to make at least a tiny bit of sense financially.

It explains why often startups can do with five or ten good hackers what in an established company requires a fifty-person business unit. It’s not that they need those fifty people, it’s just that they might as well have them.

It explains why so many people feel like they have bullshit jobs. Because, in fact, bullshit is exactly what their jobs are.

It explains why industries under disruption have such a hard time changing, why they’re so brittle despite having been around for so long. The more employees, the harder it is to change how you do things. And to squeeze out that extra bit of marginal profit, it’s likely that you’ve gone from hiring t-shaped experts to people who are really good at just one thing, which might no longer be the thing you need.

And of course, in reality, companies often keep hiring people even when there’s no marginal profit to be had. Because the boss really wants a secretary. Because the engineers are on the verge of a burn-out. Because it might pay off in the future. Because how else are you going to grow?

I don’t think there’s a moral here. But it makes you think, doesn’t it?

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The marginal revenue productivity theory of wages by @stdbrouw 

 writes about statistics, computer code and the future of journalism. Used to work at the Guardian, Fusion and the Tow Center for Digital Journalism, now a data scientist for hire. Stijn is @stdbrouw on Twitter.