Labor Intensive Meaning
Labor Intensive simply means the production activity that requires large amount of labor to manufacture the product or services and therefore has a higher proportion of labor input as compared to the capital input.
Cobb-Douglas Production Function
In the study of economics, this is generally defined in terms of the Cobb-Douglas production function, the generic equation of which is as follows:
- Here Y stands for the total production output.
- L is the quantity of labor.
- K is the quantity of capital (financing of machinery & equipment etc.)
- A is the autonomous factor, sometimes referred to as total factor productivity, which contains the impact of factors other than labor and capital on the production. it is sometimes also referred to as the state of technology.
- Alpha and Beta are the elasticity of the respective factors, and at times also the wage rate for labor and interest of capital.
Now for a labor-intensive production function, the labor input will be higher than the capital input, i.e. most of the products will be handmade rather than being mechanized.
Examples of Labor Intensive Industries
Let’s discuss the nature of labor-intensive industries with examples.
#1 – Customized Products
Products within the fashion industry are customized and every product design is unique. Fashion Designing is, therefore, a labor-intensive industry and requires highly skilled labor. Mass-produced clothing, however, can be produced in a capital intensive manner where every item is the same and can, therefore, be produced in a mechanized fashion.
#2 – Services
Produce of professionals such as doctors, accountants or lawyers is in the form of services and is, therefore, labor-intensive as this skill can’t be mechanized. In current times, a lot of repetitive processes are being automated even in the services industry, however, without human interaction, these services can’t be completely executed.
#3 – Research & Development
Scientific discoveries and innovations cannot completely avoid human involvement. Even with a lot of research being conducted in the field of Artificial Intelligence, human involvement is still required to understand the need of present times and the present state of technology and bridge the gap between the two.
#4 – Real Estate Development
Most of the construction work is labor-intensive, whether in developed or developing economies. The cost of newer technologies such as 3D printing in such an industry is so high that not all economies can afford it. And even with the mechanization of most of the equipment, such as cranes and forklifts, human involvement is indispensable. Machines act as tools and reduce the amount of labor required, however, they can’t completely eliminate the use of labor.
#5 – Agriculture
The labor intensity in the agricultural sector is a barometer on the level of development in an economy. Most underdeveloped and developing economies have high labor intensity and as the economies become more and more mechanized or industrialized, there is a structural shift in the quantum of labor involved in agriculture, reducing the labor intensity in this sector.
Advantages of Labor Intensive Production Technology
There are several different advantages of the labor-intensive are as follows:
- Unique Output: Certain industries such as carpet weaving industry are renowned for the product being unique and the weaving being intricate. This is the unique selling point that fetches them at a very high price than mass-produced items.
- Variable Expense: Employment of labor can be varied depending upon the number of sales, however, the money spent on the purchase of machinery and equipment is a sunk cost. If sales are not received at an appropriate level, fixed investment leads to higher capital blockage than labor wages, which can be reduced by laying off employees in case of such a situation.
- Innovation: When human beings are involved, in the production, they can keep track of changing tastes and preferences, and therefore they keep innovating in order to keep up with the times and needs of their consumers. Complete mechanization would lose out on such indicators and therefore may lead the industry to a dead-end.
- Cost-Effective: Most developing economies are labor-intensive as it costs lesser as compared to the cost of machines. This enables such economies to undertake production which drives their growth. From a strategic point of view, at times even developed economies believe in outsourcing to developing economies to benefit from lower costs of production. Although there are several complications of human rights violations when it comes to outsourcing as it happened in the case of Nike, however, that is not always the case.
Limitations of Labor Intensive Production Technology
There are several limitations of the labor-intensive are as follows:
- Lower Output: Due to the limitations of the speed of a human being as compared to a machine, the level of output is lower than that of the mechanized industry. Therefore the supply lags the demand and the consumers switch to substitutes.
- Lower Turnover: As labor-intensive work requires a lot of hard work, the prices set for such products are quite high and therefore is not affordable by all kinds of consumers. Examples could be designer clothing. therefore this results in lower turnover.
- Unsatisfied Demand: As the product is unique, reproducing identical goods is not always possible, the consumers need to settle for slightly differentiated products and that may not always lead to some level of satisfaction and may even lead to a loss of certain demand, where the consumer is not in favor of compromise.
- Quality Standards: Human error cannot be completely eliminated and therefore the quality of produce suffers. Mechanized products are standardized and therefore the quality standards are maintained.
Technological advancement has led to lower employment of labor in certain industries because the marginal product per unit of labor has increased. This has made industries less labor-intensive, however, certain industries can never be completely mechanized due to the nature of the product of such industries.
Machines will always require some level of human involvement even with higher levels of automation, to understand the changing dynamics of the consumer demands and satisfaction levels.
This has been a guide to what is labor-intensive and it’s meaning. Here we discuss examples of labor-intensive industries along with the cobb-Douglas production function. We also discuss its advantages and limitations. You can more about finance from the following articles –