What is 'Labor Intensive'
Labor intensive refers to a process or industry that requires a large amount of labor to produce its goods or services. The degree of labor intensity is typically measured in proportion to the amount of capital required to produce the goods or services; the higher the proportion of labor costs required, the more labor intensive the business.
BREAKING DOWN 'Labor Intensive'Labor-intensive industries include restaurants, hotels, agriculture and mining. Advances in technology and worker productivity have moved some industries away from labor-intensive status, but many still remain.
Labor costs are considered variable, while capital costs are considered fixed. This gives labor-intensive industries an advantage in controlling expenses during market downturns by controlling the size of the employee base. Disadvantages include limited economies of scale as you cannot pay workers less by hiring more of them, and susceptibility to wage forces within the labor market.
A labor-intensive industry is any industry that requires a significant amount of human capital to produce its goods or services. Often, these positions require large quantities of physical effort to complete the tasks. In labor-intensive industries, the costs associated with securing the necessary personnel outweigh the capital costs in regards to importance and volume. While there are many associate labor-intensive jobs with lower levels of skills or education, this is not true of all labor-intensive positions.
A prime example of a labor-intensive industry relates to agriculture, especially those companies involved in the cultivating of food items that must be picked with minimal damage to the plant as a whole, such as fruit from fruit trees. The construction industry is considered labor intensive as most of the required work is hands-on. Even with the use of certain tools, a person must be involved with the vast majority of the work. Many positions considered part of the service industry are considered labor intensive. This includes positions within the hospitality industry and the personal care industry.
Labor costs encompass all of the necessary funds used to secure the human capital necessary to complete the work. This can include funds directed toward base wages along with any benefits that may be supplied. Labor costs are highly flexible, allowing the business to adjust based on current demands and overall affordability.
Capital costs most often relate to the equipment necessary to meet production needs. This can include machinery in a manufacturing environment, vehicles for transporting goods or other materials, and the facilities in which the work is done. Capital costs are often fixed in nature, limiting the amount that can be changed on a day-to-day basis.