Question

In 2009 General Motors (GM) announced that it would reduce employment by 21,000 workers. What does this decision reveal about how GM viewed its marginal revenue product (MRP) and marginal resource cost (MRC)? Why didn't GM reduce employment by more than 21,000 workers? By fewer than 21,000 workers? \(\lfloor\) O16.3

Short answer

GM reduced employment by 21,000 workers because the MRP was below the MRC for those workers. They did not reduce more because it would have balanced MRP with MRC, and fewer would still have kept MRP below MRC.

Step-by-step solution

Understanding Marginal Revenue Product and Marginal Resource Cost

The Marginal Revenue Product (MRP) represents the additional revenue generated by employing one more unit of labor or another resource. The Marginal Resource Cost (MRC) is the additional cost of employing one more unit of labor. If a firm is looking to maximize profit, it will hire workers until the MRP equals the MRC.

Evaluating GM's Employment Reduction Decision

By choosing to reduce employment by 21,000 workers, GM likely determined that the MRP of those workers was lower than the MRC. This indicates that for each additional worker, the cost outweighed the revenue that they contributed to the company, leading to the decision to cut jobs to optimize profit.

Analyzing the Decision Not to Reduce More than 21,000 Workers

GM likely did not cut more than 21,000 workers because they estimated that any further reductions would result in equalizing their MRP with their MRC or even position the MRP above the MRC. Cutting more workers would therefore have led to a greater decrease in productivity and profits, as the remaining workers would have contributed more to the profits than their cost.

Reasoning for Not Reducing Less than 21,000 Workers

Similarly, reducing fewer than 21,000 workers might have left GM in a situation where the MRP was still lower than the MRC, meaning the labor costs would still exceed the revenue generated by some workers. GM had to reach this specific reduction point to align their costs and benefits properly.

Key concepts

Marginal Resource Cost

Marginal Resource Cost (MRC) is a critical concept that businesses use to determine the cost of hiring an additional employee or acquiring another unit of input.
Understanding MRC helps firms decide "how much" they should spend when expanding their labor force or resources.

It's like this:

• Adding Costs: Each new hire or additional resource increases costs. So, MRC represents this specific cost increment.
• Decision-making: Companies hire until the cost of hiring one more worker (MRC) matches the revenue the worker brings in (MRP).

In GM's case, the reduction by 21,000 workers likely happened because these workers' contribution in terms of revenue (MRP) did not justify their employment cost (MRC).
Each additional worker would cost GM more than the revenue they were bringing in, which is not ideal for maximizing profits.

Profit Maximization

Profit maximization is the driving force behind most business decisions. It’s about balancing the costs and revenues in such a way that a company makes the most profit possible.
Here’s how it's generally approached:

• Aligning MRP and MRC: Businesses continue to hire resources as long as the MRP exceeds or equals the MRC. This ensures fairness in cost versus revenue.
• Cutting Losses: When MRP is less than MRC, it's essential to reduce workforce or resources to cut unnecessary costs and thus enhance profitability.

For GM, the decision to lay off 21,000 workers was driven by the principle of aligning their MRP with their MRC.
This strategy helped to keep GM profitable by ensuring that no resources were spent beyond their worth.
It was a careful calculation to avoid unnecessary costs associated with overstaffing.

Employment Reduction

When a company like General Motors decides to reduce employment, the reasons go beyond just cutting costs.
Reducing the workforce can be a strategic decision aimed at long-term profitability.

• Calculating Needs: If the MRP is lower than the MRC, the workers' jobs are not financially viable, prompting reductions.
• Stemming Losses: Only by reducing precisely 21,000 workers, GM avoided overshooting this balance and maintained effective operations.
• Adjustment: Too few reductions wouldn't bring costs down enough, while too many could harm remaining workers' productivity and company output.

GM's decision illustrates strategic foresight, balancing current finances with future growth opportunities.
The key was finding a point where benefits matched costs, avoiding excess and deficiency.