This is simply the law of diminishing marginal returns specifically concerning the use of labor.
http://en.wikipedia.org/wiki/Marginal_p ... al_returns
An example: Two men can dig a small ditch faster than one (one can dig very fast using all of his energy while the other one recuperates). But since there is only room for one man digging in the ditch, adding a third man adds significantly less than adding the second man. At some point, the benefit of an additional digger will be less than the cost of hiring the digger, resulting in a loss of productivity.
Unless you are in the army, of course... in which case you have two men taking turns digging the ditch, and 18 men playing cards... and no one gets paid...