The Lewis model with unlimited supply of labour is a foundational concept in
development economics, proposed by W. Arthur Lewis in 1954. It explains the
process of economic development in a dual-sector economy, where a traditional
agricultural sector, characterized by subsistence farming and low productivity,
coexists with a modern industrial sector, which is capital-intensive and has
higher productivity.

In the
model, the traditional sector has a large surplus of labour, meaning many
workers contribute little or nothing to total output. This surplus allows
workers to be transferred to the modern sector without reducing agricultural
output. Development occurs when labour moves from the low-productivity
traditional sector to the high-productivity modern sector, which grows through
reinvestment of profits and capital accumulation.

The model
assumes that the modern sector attracts labour by offering a wage slightly
above the subsistence level, ensuring a constant wage rate in the early stages
of development. The traditional sector is assumed to have an unlimited supply
of labour, meaning labour can be drawn from it without significant wage
increases in the modern sector. Profits in the modern sector are reinvested,
leading to expansion and increased demand for labour, which further accelerates
the transfer of workers from the traditional sector.

This
process of structural transformation unfolds in stages. Initially, surplus labour
from the traditional sector is absorbed by the modern sector at a constant wage
rate. As the modern sector grows, it accumulates capital, increasing the
marginal productivity of labour. Eventually, the surplus labour in the
traditional sector is exhausted, marking a turning point where additional labour
migration begins to increase wages in both sectors. This wage rise signals the
end of the unlimited supply of labour and marks the transition to a fully
industrialized economy.

Now let’s
explain these dual sectors and their features

Sectors in the Lewis Model

o    Traditional (Agricultural) Sector:

o    Dominated by subsistence farming.

o    Characterized by low
productivity, minimal use of technology, and abundant labour supply.

o    Surplus labour exists, meaning
many workers contribute little or nothing to total output (marginal
productivity of labour is zero or negligible).

2. Modern (Industrial) Sector:
• Capital-intensive and more
  productive.
• Focused on manufacturing
  and industrial activities.
• Operates at higher wages
  compared to the traditional sector, which attracts labour from
  agriculture.

Stages of Development in the
Lewis Model

1. Stage 1: Surplus Labour
   Phase
• In the initial stage, the
  traditional sector has an unlimited supply of labour due to surplus
  workers.
• Labour can migrate to the
  modern sector without reducing agricultural output since the marginal
  productivity of the surplus workers is negligible.
• The modern sector offers a
  slightly higher wage than the subsistence level, attracting labour from
  the traditional sector.
• Profits generated in the
  modern sector are reinvested, leading to capital accumulation and further
  expansion of industrial output.
2. Stage 2: Transition Phase
• As labour continues to move
  to the modern sector, the industrial sector grows larger, and the
  agricultural sector shrinks in relative terms.
• Capital accumulation in the
  modern sector increases the demand for labour and raises the marginal
  productivity of labour.
• The constant wage rate in
  the modern sector persists during this stage because of the ongoing
  availability of surplus labour from the traditional sector.
3. Stage 3: Turning Point
• The surplus labour in the
  traditional sector is eventually exhausted.
• With no additional surplus labour
  available, further labour migration begins to increase wages in the
  modern sector.
• The traditional sector
  starts experiencing labour shortages, leading to a rise in wages there as
  well.
• This stage marks the end of
  the unlimited supply of labour, and the economy begins transitioning to a
  fully industrialized and modernized structure.
4. Stage 4: Post-Transition
   Phase
• Both sectors experience
  rising wages, and the modern sector becomes dominant in the economy.
• Agricultural productivity
  may need to improve through technological advancements to support the
  shrinking agricultural workforce.

This model has various strengths like it generates
the relationship between the Sectors

• The traditional sector
  provides a reservoir of cheap labour for the modern sector.
• Reinvestment of profits in
  the modern sector drives expansion, creating a feedback loop where more labour
  is absorbed, and productivity rises.
• As the traditional sector’s labour
  pool diminishes, agricultural wages rise, signalling the end of the
  dual-sector phase.

 

This model
 can be illustrated using a diagram where
the x-axis represents the labour force, and the y-axis represents wages and
output. A horizontal line depicts the constant wage rate in the modern sector
due to the unlimited labour supply. The marginal product of labour curve in the
modern sector rises as capital accumulates and the sector expands. Initially, labour
migration occurs without increasing wages, but as the surplus labour is
absorbed, wages start to rise, shifting the economy towards higher levels of
productivity and income.

While the
Lewis model provides a powerful framework to understand economic development,
it has faced criticism. For instance, the assumption of surplus labour may not
hold in all economies, and profits in the modern sector are not always
reinvested domestically. Additionally, the migration of labour from rural to
urban areas may face institutional, cultural, or infrastructural challenges.
The neglect of agricultural productivity and the potential for increased income
inequality during the early stages of industrialization are also noted as
limitations.

Despite
these criticisms, the Lewis model remains an essential tool for analysing the
dynamics of economic development in dual-sector economies.