---
title: "Marginal Cost of Labor | Principles of Economics"
description: "Marginal Cost of Labor is the extra cost of hiring one more worker in Principles of Economics, shaping labor demand, wages, and employment decisions."
canonical: "https://fiveable.me/principles-econ/key-terms/marginal-cost-labor"
type: "key-term"
subject: "Principles of Economics"
unit: "Unit 14"
---

# Marginal Cost of Labor | Principles of Economics

## Definition

Marginal Cost of Labor is the extra cost a firm pays to hire one more worker. In Principles of Economics, it helps show how firms decide wages and employment.

## What It Is

Marginal Cost of Labor is the additional cost a firm faces when it hires one more unit of labor, usually one more worker or one more hour of work. In Principles of Economics, it sits right at the center of labor demand because firms compare that extra cost with the extra revenue the worker brings in.

The basic idea is simple: if adding another worker raises total labor cost by $15 per hour, then the marginal cost of labor for that worker is $15. Firms do not hire just because they can. They hire when the extra revenue from the worker, called marginal revenue product of labor, is at least as large as the extra labor cost.

In a perfectly competitive labor market, the marginal cost of labor is the market wage. That makes hiring decisions fairly direct, because the firm is a wage taker and each additional worker costs the same wage rate. If a worker adds more revenue than that wage, hiring makes sense.

Things get more complicated in a monopsony, where one employer has market power over hiring. If the firm must raise wages to attract more workers, the marginal cost of labor can rise faster than the wage itself. That happens because paying a higher wage to the new worker can also force the firm to pay more to workers already on the payroll.

You can think of marginal cost of labor as the firm’s stop sign for hiring. When the cost of the next worker catches up to or passes the revenue that worker produces, hiring slows or stops. That is why the curve matters in labor market graphs and in questions about why wages and employment differ across market structures.

## Why It Matters

Marginal Cost of Labor matters because it connects the firm’s hiring choice to the shape of the labor market. A lot of labor market questions are really asking, “What happens when hiring one more worker costs more, or less, than the value that worker creates?” This term gives you the cost side of that calculation.

It also helps you explain why the same worker can be hired in one market but not in another. In a competitive labor market, the marginal cost of labor usually equals the wage, so the hiring rule is straightforward. In a monopsony, labor market power changes that rule, which can lower wages and employment compared with a competitive market.

This term also shows up whenever a problem asks you to trace how a firm responds to a change in wages, labor supply, or market power. If labor supply becomes less elastic, the cost of expanding the workforce rises more quickly, which changes the firm’s decision. That makes marginal cost of labor a useful bridge between graph reading and real labor market cases.

For essays, free-response style questions, or class discussions, it gives you a clean way to explain firm behavior without hand-waving. You can point to the firm’s profit-maximizing rule, compare marginal revenue product to marginal cost, and then describe how wages and employment are determined.

## Connections

### [Marginal Revenue Product of Labor](/principles-econ/key-terms/marginal-revenue-product-labor)

This is the revenue side of the hiring decision. Firms compare the extra revenue from one more worker with the extra cost of that worker, so marginal revenue product and marginal cost of labor work as a pair.

### Profit Maximization

A firm maximizes profit by hiring until the benefit of one more worker matches the cost of that worker. Marginal cost of labor is part of the profit-maximizing rule because it shows when hiring should stop.

### [Monopsony Power](/principles-econ/key-terms/monopsony-power)

Monopsony power changes marginal cost of labor because a dominant employer can affect wages by changing how much labor it hires. That is why marginal cost can sit above the wage in monopsony models.

### [Elasticity of Labor Supply](/principles-econ/key-terms/elasticity-labor-supply)

How responsive workers are to wage changes affects the shape of labor supply facing a firm. A less elastic supply often means hiring more workers pushes costs up faster, which changes marginal cost of labor.

## On the AP Exam

A problem set question might give you a labor market graph and ask when a firm stops hiring. You use marginal cost of labor by comparing it to marginal revenue product of labor, then identifying the profit-maximizing number of workers. If the market is perfectly competitive, you should expect marginal cost of labor to match the wage. If the question describes a single dominant employer or other labor market power, you should check whether marginal cost rises above wage and whether employment ends up lower than in a competitive market. In short-answer questions, define the term, then connect it to the firm’s hiring rule and the shape of the labor supply curve.

## Marginal Cost of Labor vs Marginal Revenue Product of Labor

These are often mixed up because both show up in the hiring decision. Marginal revenue product is the extra revenue one more worker brings in, while marginal cost of labor is the extra cost of hiring that worker. Firms hire when revenue from labor is at least as large as its cost.

## Key Takeaways

- Marginal Cost of Labor is the extra cost a firm pays to hire one more worker or hour of labor.
- Firms use it with marginal revenue product of labor to decide whether hiring another worker increases profit.
- In a perfectly competitive labor market, marginal cost of labor usually equals the wage rate.
- In a monopsony, marginal cost of labor can be higher than the wage because raising wages may affect all workers, not just the newest hire.
- If marginal revenue product falls below marginal cost of labor, the firm has little reason to keep expanding employment.

## FAQs

### What is Marginal Cost of Labor in Principles of Economics?

It is the extra cost a firm incurs when it hires one more worker or adds one more unit of labor. In labor market models, this cost helps determine how many workers a firm will hire and what wage outcomes make sense.

### How is Marginal Cost of Labor different from Marginal Revenue Product of Labor?

Marginal cost of labor is the cost side of the hiring decision, while marginal revenue product of labor is the benefit side. A firm keeps hiring while the revenue from the next worker is at least as large as that worker’s cost.

### Why can Marginal Cost of Labor be higher than the wage?

That usually happens in a monopsony or other imperfectly competitive labor market. If the firm must raise wages to attract more workers, it may also have to pay a higher wage to workers already employed, which pushes marginal cost above the market wage.

### How do you use Marginal Cost of Labor on a graph or problem?

Look for the point where the firm’s marginal revenue product of labor meets marginal cost of labor. That is the hiring rule, and it tells you the profit-maximizing level of employment. If a graph includes a wage line and a labor supply curve, the market structure will change how you read that point.

## Related Study Guides

- [14.1 The Theory of Labor Markets](/principles-econ/unit-14/1-theory-labor-markets/study-guide/SebsteXXdmB265MT)
- [14.2 Wages and Employment in an Imperfectly Competitive Labor Market](/principles-econ/unit-14/2-wages-employment-imperfectly-competitive-labor-market/study-guide/hSXtyT8EAz9mIYjB)

## About This Document

Canonical Fiveable pages are available as Markdown at the same path plus `.md`.

- [llms.txt](https://fiveable.me/llms.txt): index of Fiveable's sections and URL patterns
- [llms-full.txt](https://fiveable.me/llms-full.txt): complete subject and unit listing
- [MCP server](https://fiveable.me/mcp): call Fiveable as tools instead of fetching pages (`https://fiveable.me/api/mcp`)
- [MCP server for AP teachers](https://fiveable.me/mcp/teachers): a teacher's classes, assignments and AP-rubric grading (`https://fiveable.me/api/mcp/teacher`)

## Structured Data

```json
{"@context":"https://schema.org","@graph":[{"@type":"LearningResource","@id":"https://fiveable.me/principles-econ/key-terms/marginal-cost-labor#resource","name":"Marginal Cost of Labor | Principles of Economics","url":"https://fiveable.me/principles-econ/key-terms/marginal-cost-labor","learningResourceType":"Concept explainer","educationalLevel":"AP® / High School","about":{"@id":"https://fiveable.me/principles-econ/key-terms/marginal-cost-labor#term"},"audience":{"@type":"EducationalAudience","educationalRole":"student"},"dateModified":"2026-07-03T02:24:05.230Z","isPartOf":{"@type":"Collection","name":"Principles of Economics Key Terms","url":"https://fiveable.me/principles-econ/key-terms"},"author":{"@type":"Organization","@id":"https://fiveable.me/editorial#content-team","name":"Fiveable Content Team","url":"https://fiveable.me/editorial","parentOrganization":{"@id":"https://fiveable.me/#organization"},"member":[{"@type":"Person","name":"Amanda DoAmaral","sameAs":["https://www.linkedin.com/in/adoamaral"]},{"@type":"Person","name":"Becky Bahr","sameAs":["https://www.linkedin.com/in/becky-bahr-b52743132"]}]},"publisher":{"@type":"Organization","name":"Fiveable","url":"https://fiveable.me"}},{"@type":"DefinedTerm","@id":"https://fiveable.me/principles-econ/key-terms/marginal-cost-labor#term","name":"Marginal Cost of Labor","description":"Marginal Cost of Labor is the extra cost a firm pays to hire one more worker. In Principles of Economics, it helps show how firms decide wages and employment.","url":"https://fiveable.me/principles-econ/key-terms/marginal-cost-labor","inDefinedTermSet":{"@type":"DefinedTermSet","name":"Principles of Economics Key Terms","url":"https://fiveable.me/principles-econ/key-terms"}},{"@type":"FAQPage","mainEntity":[{"@type":"Question","name":"What is Marginal Cost of Labor in Principles of Economics?","acceptedAnswer":{"@type":"Answer","text":"It is the extra cost a firm incurs when it hires one more worker or adds one more unit of labor. In labor market models, this cost helps determine how many workers a firm will hire and what wage outcomes make sense."}},{"@type":"Question","name":"How is Marginal Cost of Labor different from Marginal Revenue Product of Labor?","acceptedAnswer":{"@type":"Answer","text":"Marginal cost of labor is the cost side of the hiring decision, while marginal revenue product of labor is the benefit side. A firm keeps hiring while the revenue from the next worker is at least as large as that worker’s cost."}},{"@type":"Question","name":"Why can Marginal Cost of Labor be higher than the wage?","acceptedAnswer":{"@type":"Answer","text":"That usually happens in a monopsony or other imperfectly competitive labor market. If the firm must raise wages to attract more workers, it may also have to pay a higher wage to workers already employed, which pushes marginal cost above the market wage."}},{"@type":"Question","name":"How do you use Marginal Cost of Labor on a graph or problem?","acceptedAnswer":{"@type":"Answer","text":"Look for the point where the firm’s marginal revenue product of labor meets marginal cost of labor. That is the hiring rule, and it tells you the profit-maximizing level of employment. If a graph includes a wage line and a labor supply curve, the market structure will change how you read that point."}}]},{"@type":"BreadcrumbList","itemListElement":[{"@type":"ListItem","position":1,"name":"Principles of Economics","item":"https://fiveable.me/principles-econ"},{"@type":"ListItem","position":2,"name":"Key Terms","item":"https://fiveable.me/principles-econ/key-terms"},{"@type":"ListItem","position":3,"name":"Unit 14","item":"https://fiveable.me/principles-econ/unit-14"},{"@type":"ListItem","position":4,"name":"Marginal Cost of Labor"}]}]}
```