The concept of Lewis theory of disguised unemployment, often referred to as the “Lewis Model” or “Dual Sector Model,” is a foundational concept in development economics. It explains the structural transformation of an underdeveloped economy, characterized by a traditional agricultural sector and a modern industrial sector. Lewis’s model begins with the premise that many underdeveloped economies have a significant portion of their labour force employed in the agricultural sector. In this sector, productivity is extremely low, and there is a surplus of labour, meaning that a substantial number of workers contribute little or nothing to total output. This surplus labour represents disguised unemployment, where workers appear employed but their marginal productivity is zero or negligible.In the Lewis framework, the agricultural sector operates under conditions of diminishing returns, with limited capital and technology. This results in low productivity and wages. The modern industrial sector, on the other hand, has higher productivity due to better technology, access to capital, and economies of scale. It offers higher wages than the subsistence-level incomes typically found in agriculture. The difference in wages between the two sectors creates a pull factor, encouraging labour to migrate from agriculture to industry.According to Lewis, the transformation of an economy begins with the industrial sector absorbing surplus labour from agriculture. Since the marginal productivity of surplus labour in agriculture is zero or very low, transferring these workers to the industrial sector does not reduce agricultural output. As labour moves to industry, it contributes to higher productivity and output in the industrial sector, leading to economic growth. The profits generated in the industrial sector can be reinvested to expand capacity, further increasing the demand for labour. This process continues until the surplus labour in agriculture is exhausted, at which point the marginal productivity of labour in agriculture becomes positive, and wages in the two sectors begin to converge.A key feature of the Lewis model is the concept of the “capital accumulation mechanism.” The industrial sector generates profits by paying workers wages that are slightly higher than the subsistence level but still lower than their marginal productivity. These profits are reinvested into the industrial sector to enhance capital stock, improve technology, and increase productivity. This reinvestment drives the growth of the industrial sector, allowing it to absorb more labour over time.The Lewis theory assumes that the supply of labour to the industrial sector is virtually unlimited in the early stages of development, as the agricultural sector has a large pool of surplus labour. However, as the industrial sector expands and surplus labour is absorbed, the agricultural sector begins to experience labour shortages. This leads to rising wages in agriculture, reducing the wage gap between the two sectors. At this point, the economy transitions from being labour-surplus to labour-scarce, and further industrial growth must be supported by productivity improvements rather than the simple transfer of labour.While the Lewis model provides valuable insights into the process of economic development, it has been critiqued for several reasons. It assumes that industrial profits will always be reinvested domestically, which may not occur in economies with capital flight or weak institutions. It also presumes that the industrial sector can absorb labour indefinitely, ignoring potential constraints like limited demand for industrial goods or the inability of workers to acquire the skills needed for industrial jobs. Additionally, the model assumes that agricultural productivity remains constant during the early stages of labour transfer, which may not hold true in reality.Despite these limitations, the Lewis theory of disguised unemployment remains a cornerstone of development economics. It highlights the importance of structural transformation, capital accumulation, and productivity growth in driving economic development, offering a framework for understanding the challenges and opportunities faced by labour-surplus economies.
