Question

In the context of economics in labor markets why can small differences in productivity yeild huge differences in what employers are willing to pay?

Answer 1

Employers' willingness to pay for high productivity is because of the higher output yielding with the same input of labor. For example, a manufacturing unit has 10 labors at its disposal and their normal productivity yields 100 units of output per hour which means averagely one labor produces 10 units of output in an hour. Suppose the cost of labor is $20 per hour, that means the cost of producing 100 units of output is $200. Similarly, if the unit wants an output of 120 units it would normally require 12 labors and the cost would be $240 per hour. However, if the initial 10 labors increase their productivity by 20% the output of 120 units can be achieved within the same cost. Hence, employers are willing to pay more for high productivity labors.