Labour Intensive

Introduction

A business firm is the combination of four factors of production that produce goods and services in order to satisfy the needs and wants of customers. All businesses use factors of production (resources), including land, labour capital and enterprise. Some firms use more labour, while others use more capital. In this article, we will discuss those types of businesses and process while use high level of labour.

What is Labour Intensive?

Labour intensive refers to businesses or processes that use a high level of labour as compared to the amount of capital to produce goods and services. An industry, business or production process is called labour intensive if more labour is used in the production process as compared to the machines.

In labour intensive production, the cost of labour is the largest percentage of the total cost of production. In simple words, labour intensive firms have a higher proportion of labor costs as compared to capital cost.

Labour Intensity

Labour intensity refers to the extent to which a business or production relies on labour for producing goods and services. The degree of labor intensity is normally measures by calculating the proportion of labour cost out of the total cost of production. A higher proportion of labour cost means a higher labour intensity.

Labour Intensive vs. Capital Intensive

Labour intensive firms use more labour as compared to capital in producing goods and services, while capital intensive firms use more capital as compared to labour. This is illustrated by the following diagram.

Labour intensive firms incur higher labour cost, while capital intensive firms have lower labour cost and a higher cost of capital investment.

The following table summarises the main points of difference between labour intensive and capital intensive.

Determinants of Labour Intensity

The following are some determinants of labour intensity:

Availability of Labour

In countries with more population, a higher quantity of labour is available, that too at significantly low wages. In these countries, firms use that labour and become labour intensive. These countries include India, Bangladesh, Pakistan and some other Asian countries. Please note that the availability of more labour does not means that all the business firms in these countries will be labour intensive. There are many other determinants of labour intensity which play a role.

Availability of Finance

Capital intensity requires huge amount of funds in order to buy expensive machines and other forms of capital. Normally, new and small firms don’t have huge amounts of funds available, hence, they rely more on labour and become labour intensive.

Nature of Production

Labour intensity also depends on the nature of production. In job production, where one-off and customised products are produced in small quantities, more labour is used as compared to the machines. In job production, customised products require craftsmanship and special expertise, which demands the use of labour in a greater proportion as compared to machines.

Technological Factors

In past, before industrialisation, machines and other forms of capital were not available and business firms were labour intensive. Due to the availability of more and cheaper machines, it has become easy for firms to replace manual labor with machines. That is why; technological advancements are reducing labour intensity.

Output Level

Labour intensive firms produce less output as compared to capital intensive firms. So, if a firm is targeting a small market and a low output level is to be produced, it is more likely to be labour intensive.

Task Complexity

Labour-intensive industries can also be affected by task complexity because they need detailed work that involves more labour-intensive work. To perform complex tasks, workers need a team of employees with high levels of skills. But in the case of simple tasks, companies need fewer employees, which means they are less labour-intensive.

Examples of Labour-Intensive Industries

The following are some examples of labor-intensive industries:

Manufacturing

Manufacturing industries such as those involved in the production of goods, food processing, and shoe-making need a lot of workers to perform the labor-intensive manufacturing processes manually. In manufacturing industries, there are a large number of workers performing intense physical and mental efforts.

Agriculture

This industry is also highly labour-intensive because the agriculture field includes farming and the production of other livestock, which require intensive labour. The workers have to perform intense tasks such as planting, fruit picking, harvesting crops such as wheat and rice, and tending to crops or animals, that require a huge amount of manpower to perform these services.

Hospitality and Tourism

Industries such as the hotel and tourism industries are more labour-intensive as compared to other service industries. The hotel industry, tourism industry, and restaurant industry are those that require a large number of employees to perform different tasks, like customer service, housekeeping, and food preparation to meet the needs of their guests, customers, or visitors.

Nursing

Nursing is an industry which requires the services and skills of trained staff. Human beings are needed to take care of the patients and machines cannot do this job. That is why nursing industry is highly labour intensive. The same is the case with some other services where human judgement is critical such as teaching and the services provided by cleaners and electricians.

Labour Intensity and Economic Development

Generally, the poor and less developed countries have more labour intensive firms industries. This is because these poor countries have less income, which is not sufficient to buy expensive capital goods. Moreover, labour is abundant and cheap which makes firms more inclined towards using a large amount of labor in the labor-intensive process. Many poor countries rely on agriculture which is a labour intensive industry.

On the other side, rich and developed countries have high income and real wages and they can afford to buy expensive capital equipment. Moreover, wages in these rich countries are high. These factors make rich countries more capital intensive.

With economic development and the advancement in technology, many countries are substituting manual labor (physical labor) with capital to increase their output. So, we can say that economic development is associated with decreasing labour intensity. 

Advantages of Labour Intensity

The following are some advantages of labour intensity:

Customisation

A major advantage of labour intensity is the production of customised products. The production of tailor-made garments, special order cakes, and customised jewelary are some examples of customised products which require special skills of the workforce. This customisation gives some firms a competitive advantage and makes the customers happy and satisfied.

Low Start-up Cost

Labour intensive firms have lower start-up cost because expensive capital equipment is not purchased. It is cheaper to hire labour at low wage as compared to buying expensive machines. These circumstances make labour intensity a suitable choice for new firms which mostly face funding issues. With limited funds, it is easier to start a labour intensive firm than a capital intensive business.

Flexibility and Adaptability

Another advantage of labour intensive firms is that they are adaptable and flexible to changing market demands and fluctuations. With the help of labour, firms can respond to the evolving trends and changing tastes of customers by making changes in their products and processes.

Disadvantages of Labour Intensity

The following are some major disadvantages of labour intensity:

No Economies of Scale

Economies of scale refer to the decrease in average cost due to an increase in the scale of operations. Labour intensive firms produce a lower quantity of output and hence cannot benefit from economies of scale. On the other hand, capital intensive firms have a lower average cost due economies of scale. This cost disadvantage makes labour intensive firms less competitive in the market as compared to capital intensive firms.

Slow Production

The speed of production is slow in labour intensive firms. On the other hand capital intensive firms have speedy production, which helps them produce large quantities of output in short amount of time. Due to this reason, it is difficult for labour intensive firms to increase the scale of production and target a bigger market.

Human Inefficiencies

Labour intensive firms face human inefficiencies. The illness of some key workers could lead to production target not met. Production can also be affected by workers taking days off or due to their industrial actions. There may also be the shortages of skilled workers which result in further difficulties in labour intensive production.

Conclusion

In conclusion, labour intensive means the use of more labour as compared to machines in a business. Labor-intensive operations are suitable to small and new firms which cannot afford to buy expensive capital equipment. These firms can make customised products and are more responsive to the changes in the environment. The increasing use of technology is replacing labour in many firms and making them less labour intensive.