Capital and Labour Intensity

The production operations of any business combine two factor inputs:
  • Labour – i.e. management, employees (full-time, part-time, temporary etc)
  • Capital – i.e. plant & machinery, IT systems, buildings, vehicles, offices
The relatively importance of labour and capital to a specific business can be described broadly in terms of their "intensity" (or to put it another way, significance).
  • Labour-intensive production relies mainly on labour
  • Capital-intensive production relies mainly on capital
Sounds simple! Some examples will help reinforce the point:
Labour intensive
  • Food processing (e.g. ready meals)
  • Hotels & restaurants
  • Fruit farming / picking
  • Hairdressing & other personal services
  • Coal mining
Capital intensive
  • Oil extraction & refining
  • Car manufacturing
  • Web hosting
  • Intensive arable farming
  • Transport (airports, railways etc)
The main features of each category can also be summarised as follows:
Labour intensive operations
  • Labour costs higher than capital costs
  • Costs are mainly variable in nature = lower breakeven output
  • Firms benefit from access to sources of low-cost labour
Capital intensive operations
  • Capital costs higher than labour costs
  • Costs are mainly fixed in nature = higher breakeven output
  • Firms benefit from access to low-cost, long-term financing
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