Labor intensive definition

What is Labor Intensive?

A business is labor intensive when the total cost of labor incurred is larger than the other costs of the business. A labor intensive business tends to have a high percentage of variable costs, in the form of wages. There are fewer labor intensive businesses than had been the case in the past, since improvements in efficiency and the introduction of automation have reduced the proportion of labor costs in many firms.

Advantages of a Labor Intensive Business

There are several advantages to having a labor intensive business, which are as follows:

  • Lower breakeven point. A labor intensive organization has a lower breakeven point than more capital intensive businesses, since it has fewer fixed costs that must be covered. This means that the owners can earn a profit at a lower sales level.

  • Easier to reduce costs. A labor intensive business can lay off staff during an economic downturn in order to drive down its costs and remain in business. However, this is not the case in jurisdictions where it is difficult to lay off staff.

  • Easier to scale up capacity. A labor intensive business can hire more staff to expand its production and service operations on relatively short notice. This means that it can increase sales quicker than a business that relies on machinery to produce goods.

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Disadvantages of a Labor Intensive Business

This type of business is subject to demands for higher wages, unionization, and the potential difficulty of sourcing new staff. Any one or all three of these issues can interfere with the ability of a firm to grow.

Examples of Labor Intensive Businesses

Farming, construction, and restaurants are all considered to be labor intensive businesses.