Labor Intensive

What Is Labor Intensive?

The term "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.

Understanding Labor Intensive

Labor-intensive industries or processes require large quantities of physical effort to complete necessary tasks. In labor-intensive industries, the costs associated with securing the necessary personnel outweigh the capital costs in regards to importance and volume. While many labor-intensive jobs require low levels of skill or education, this is not true of all labor-intensive positions.

Advances in technology and worker productivity have moved some industries away from labor-intensive status, but many remain. Labor-intensive industries include restaurants, hotels, agriculture, mining, as well as healthcare and caregiving.

Less developed economies, as a whole, tend to be more labor-intensive. This situation is rather common because low income means that the economy or business cannot afford to invest in expensive capital. But with low income and low wages, a business can remain competitive by employing many workers. In this way, firms become less labor-intensive and more capital-intensive.

Before the industrial revolution, 90% of the workforce was employed in agriculture. Producing food was very labor-intensive. Technological development and economic growth have increased labor productivity, reduced labor intensity, and enabled workers to move into manufacturing and (more recently) services.

As real wages rise in the economy, it creates an incentive for firms to invest in more capital to raise labor productivity, so the firm can continue to afford the cost of more expensive labor.

Special Considerations

A prime example of a labor-intensive industry is the agricultural industry. Jobs in this industry, which is closely related to the cultivation of foodstuffs that must be picked with minimal damage to the plant as a whole (such as fruit from fruit trees), are particularly labor-intensive. 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 that are part of the service industry are also labor-intensive. These positions include those within the hospitality industry and the personal care industry.

Labor costs encompass all of the costs necessary to secure the human capital necessary to complete work. These costs can include funds directed toward base wages, along with any benefits that may be given. Labor costs are considered variable, while capital costs are considered fixed.

Because labor costs can be adjusted during market downturns through layoffs or reductions in benefits, labor-intensive industries have some flexibility in controlling their expenses. Disadvantages of labor costs in labor-intensive industries include limited economies of scale, as a firm cannot pay its workers less by hiring more of them, and susceptibility to wage forces within the labor market.