If you’re a manager, how should you think about the decision of whether or not to hire another employee? On one hand, an extra employee means extra output, which means extra revenue (as long as you don’t have to lower your price too much to sell that extra output). On the other hand, that employee costs money, and there are likely other costs associated with producing the extra output. Clearly, your profit goes up when the first effect outweighs the second, so you should hire that employee when he brings in more dollars than he and his associated materials cost.
The amount of extra output you get from one extra employee (holding capital and such constant) is called the marginal product of labor, and the extra money that the employee brings in is called the marginal revenue product of labor. So, if you want to sound like an economist, you can say that you should hire the extra employee if the employee’s marginal revenue product of labor is greater than or equal to the employee’s wage (and associated materials costs). Does this mean that if you can keep getting more and more employees at the market wage you should just keep hiring employees until your office is busting at the seams?
Probably not. Imagine that you have a big factory with lots of machines but no workers. If there’s no one to run the machines, you can’t produce any output, so hiring one employee would be pretty useful. Hiring a second employee is also probably pretty useful, since the first one would otherwise be running around like a crazy person trying to operate all of the machines by himself. If you keep adding employees, however, you will eventually get to a point where the last guy you hired only has a machine to operate when somebody else leaves to go to the bathroom. Not surprisingly, this employee, even if he’s just as qualified as all of the other employees, is just not as useful as the ones that were hired before.
This concept is referred to as the diminishing marginal product of labor, and it is present in almost all worker scenarios. It might not happen right away, but eventually your factory or office will get to a point where each additional employee that you hire is less useful than the one that was hired before. This can arise either because of capital (read, machine) limitations as you saw above, or it could arise because as more and more workers are hired, more managerial overhead it needed to keep things in line.
Dilbert seems to understand that last point about managerial overhead:
I suppose that the diminishing marginal product of labor concept could also arise because more employees mean more meetings, and we all know how productive the typical meeting is.