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