Final answer:
A company may invest in more machinery instead of additional labor when faced with high labor costs, such as increased wages due to union negotiations. This switch can lead to increased productivity, but also a reduction in the labor force.
Step-by-step explanation:
In the context of managing labor costs, it is a viable option to invest in more machinery when the costs of fixed benefits are high. As labor costs increase, firms may face union demands for higher wages, which can lead to a strategic shift in production methods.
If a firm pays labor $16 an hour, including benefits, but union negotiation drives the wage up to $24 an hour, the firm may find it more cost-effective to adopt a production plan that requires fewer hours of labor and a greater investment in machinery.
This approach allows firms to increase labor productivity as union workers may work with more or better physical capital equipment. However, it does mean that the firm will likely hire fewer workers, as the need for labor decreases once machinery takes on more of the production process.