Labour-intensive or Capital-intensive production?

It is important to distinguish between capital-intensive and labour-intensive methods of production.

Capital-intensive

• ‘Capital’ refers to the equipment, machinery, vehicles and so on that a business uses to make its product or service.
• Capital-intensive processes are those that require a relatively high level of capital investment compared to the labour cost.
• These processes are more likely to be highly automated and to be used to produce on a large scale.
• Capital-intensive production is more likely to be associated with flow production (see below) but any kind of production might require expensive equipment.
• Capital is a long-term investment for most businesses, and the costs of financing, maintaining and depreciating this equipment represents a substantial overhead.
• In order to maximise efficiency, firms want their capital investment to be fully utilised (see notes on capacity utilisation).
• In a capital-intensive process, it can be costly and time-consuming to increase or decrease the scale of production.

Labour-intensive

• ‘Labour’ refers to the people required to carry out a process in a business.
• Labour-intensive processes are those that require a relatively high level of labour compared to capital investment.
• These processes are more likely to be used to produce individual or personalised products, or to produce on a small scale
• The costs of labour are: wages and other benefits, recruitment, training and so on.
• Some flexibility in capacity may be available by use of overtime and temporary staff, or by laying-off workers.
• Long-term growth depends on being able to recruit sufficient suitable staff.
• Labour intensive processes are more likely to be seen in Job production and in smaller-scale enterprises.