Harried time-study expert Hines introduces the hustling, bustling world of the Sleep-Tite Pajama Factory ("The Pajama Game"). Admonishing the workers, "Tempus fugit! Tempus fugit!" he urges them on to ever-greater productivity ("Racing With The Clock").

Handsome Sid Sorokin, the newly hired factory superintendent, muses about what it's like to arrive in a town where he has to prove himself ("A New Town Is a Blue Town"). Soon he meets Babe Williams, a member of the union's Grievance Committee, and sparks fly. Some of the static between them is about labor vs. management issues, but it's very clear to onlookers that the pair's personal chemistry is combustible. The Sleep-Tite girls delightedly observe matters between Sid and Babe heating up, even as she adamantly denies being smitten, exclaiming, "Love? Are you NUTS?" ("I'm Not at All in Love").

Another romance has been going on at the pajama factory, this one between Hines and Gladys, the President's secretary. Hines is in a constant frenzied state of jealousy over Gladys's flirtatious behavior. Another secretary, Mabel, offers some provocative imaginary scenarios to test Hines's resolve to trust Gladys in the future ("I'll Never Be Jealous Again").

Alone in his office with a dictaphone, Sid duets with his own voice about his deepening feelings for Babe ("Hey There"), before going off to the company picnic. The annual event is the opportunity for everyone to whoop it up and "lose their senses" ("Once-A-Year Day"). Sid and Babe share their first kiss and their romance quickly moves into high gear.

Soon after, Sid and Babe are in the kitchen at her place, where Babe briefly and unsuccessfully tries to slow things down ("Small Talk"). Sid declares his love, and Babe, after some brief resistance, responds similarly. In an exuberant outburst, lovers Sid and Babe proclaim their happiness in high-spirited country & western style ("There Once Was A Man").

The Union, frustrated at being the only group in the industry that hasn't received a seven-and-a half-cent hourly raise, calls a strike. As they find themselves on opposite sides in the dispute, Sid and Babe's romance is derailed. Gladys and a pair of fellow workers entertain a gathering at the Union meeting ("Steam Heat").

Hines explains his personal efficiency system to some factory girls ("Think of the Time I Save").

Determined to end the strike happily, Sid, who has learned about some secret ledgers for which Gladys keeps the key, plans to get that key by taking her to "Hernando's Hideaway" and plying her with drinks. They unexpectedly run into Babe and Hines, who think Sid and Gladys are two-timing them. Sid gets the key, examines the books, and discovers the seven-and-a half-cent raise had already been figured into costs, and the company has been making an unfair profit.

While the Union is having a big rally ("Seven-and-a-Half Cents"), he confronts the President with what he knows, and the boss gives in, agreeing to the raise. The whole company now gathers at Hernando's Hideaway (Finale) as the two couples are happily re-united amidst general merriment and celebration.