Edit: you said "but nobody's explaining the economics to me", here you go, here's the basics of corporate financial management with real numbers and a tiny bit of macroeconomics at the end.
Wait, I don't get it. You're saying if you pay a worker 1000$ a week and get revenue of 1100$, then you have a profit margin of 10%. But that's NOT profit margin (at least not the one one would use for analysis). Not to mention that those numbers are unrealistic because you'd be working at a loss for a very long time, almost guarantee.
You can't just pull numbers like that and say, "unprofitable!". Of course it isn't. You made it that way.
Besides, you're ignoring the rest of the expenses that often outweigh the payroll fund.
Back to what you called "profit margin," I'd call it "Return on Payroll Fund." It's weird, I don't like it, it ignores all of the other costs that go into creating a product, don't use it. In financial management, we use RoS, which is EBIT/Revenue. That's probably what you were thinking of. Another name for it would be "operating profit margin," likewise net profit margin would account for ALL of the expenses and not just operating ones.
Now, let's look at real numbers. I'll take Nutrien's 2023 audited financial statement as an example. (Numbers in brackets are what's deducted to get what's not in brackets)
Sales - 29056
Freight, transportation, distribution - (974)
Cost of goods sold - (19608)
EBIT - 8474
EBT - 1952
Taxes - (670)
Net earning - 1282
Out of cost of goods sold (2858) is cost of labour, let's also add (626) from general administrative expenses, and just say it's all wages.
Effective tax rate - 670/1952*100% = 34,3% (wow, that's a lot for where I live, also ignoring mining tax for simplicity)
Let's see what happens to our efficiency once the changes take effect.
All of costs can be divided into Fixed and Variable ones. Labour, in this case, is Variable because we can manipulate it by employing more staff to compensate for reduction in working hours and keep the sales at the same rate. (Contract workers are usually Fixed Cost, but it's all relative, as no Fixed Cost is ever truly fixed.)
Going from 40 => 32, we have a 20% reduction in working hours. Mind you, this doesn't mean there will be a 20% hit in productivity. It may be more, it may be less (most likely less), for simplicity let's say it's 20%. So, we need 20% more workers to compensate.
(2858+626)*120%=4180.8
New EBT = 1952 + 2858 + 626 - 4180.8 = 1255.2
New net profit = 1255.2*(1-34.3%) = 824.7. Mind you, the effective tax rate will probably be lower if employment affects deductibles.
So, our net profit margin went from 1282/29056 = 4.4% to 2.8%. Looks bad at first glance, but it's also a bad year. A year prior net profit margin was at whopping 20,3%, so a decrease from 4.4% to 2.8% would be nothing in comparison.
Will it result in increased prices? Yes, but it will also lead to economic growth, because more free time = people spend more money = companies earn more = companies grow faster, but so does inflation.