Lewis Theory of Unlimited Supply of Labour

— Notes

👤 Introduction

• Propounded by W. Arthur Lewis, published in 1954 (The Manchester School).

• Central to development economics, especially for labour-abundant, capital-scarce economies (typical of underdeveloped countries or UDCs).

• The theory is also known as the "Dual Sector Model".

⚙ Core Idea of the Model

• Labour surplus from the subsistence sector can be absorbed by the capitalist sector.

• Growth is driven by:

  • Labour transfer

  • Reinvestment of capitalist surplus

  • Capital accumulation

• Objective: Bring underdeveloped economies into self-sustaining growth.

📌 Assumptions of the Lewis Model

• Unlimited labour supply at a constant wage from the subsistence sector.

• Economy is dualistic:

  • Capitalist sector: modern, industrial, profit-oriented.

  • Subsistence sector: traditional, agriculture-based, low productivity.

• Capitalists reinvest all profits.

• Urban wages > rural wages to attract migration.

• Capitalist output per worker > subsistence output per worker.

🧩 Main Features of the Lewis Model

A. Dual Economy

• Subsistence Sector:

  • Labour-intensive, agricultural.

  • Very low productivity.

  • No significant surplus generation.

• Capitalist Sector:

  • Utilizes capital and wage labour.

  • Generates profits due to higher productivity.

  • Sector is expanding through surplus reinvestment.

• Mechanism:

  • Labour moves from rural to urban.

  • Capitalist sector grows → absorbs more workers → wages in subsistence sector rise when surplus is exhausted.

B. Capitalist Surplus

• Capitalist surplus = Marginal Product of Labour (MPL) − Wage (W).

• This surplus is:

  • Reinvested → boosts capital stock.

  • Creates more jobs → absorbs more labour from agriculture.

  • Continues until surplus labour is exhausted.

🧠 Example: Textile industry in early industrial Britain absorbing rural workers into mills.

📉 Diagrammatic Representation

• Wage in capitalist sector (OW) > subsistence wage (OS).

• Supply curve of labour (WW) is horizontal — perfectly elastic.

• As surplus is reinvested:

  • MPL shifts upward.

  • More employment (E1 to E2).

  • Surplus = area between MPL and wage line.

📈 When surplus labour is absorbed, the supply curve starts sloping upward, leading to wage rise.

🔚 End of Growth Process

Growth halts when:

1. Wages rise in capitalist sector → profit margins shrink.

2. Subsistence productivity increases due to:

   • Reduced labour in agriculture.

   • Better resource allocation.

   • Technological improvements.

3. Labour becomes organized → demands higher wages.

4. Surplus diminishes → no incentive for further investment.

❌ Criticisms of the Model

• Over-simplistic assumptions (perfect elasticity, full reinvestment).

• Ignores labour-saving technologies.

• One-sided: focuses only on supply side (labour).

• No attention to human capital, skills mismatch.

• Assumes easy migration, which is not always feasible.

• Fails in situations where new capital replaces labour.

✅ Conclusion

• Despite criticisms, it remains a foundational model in development economics.

• Especially relevant to labour-surplus economies transitioning to industrialization.

⏳ 1-Minute Revision Summary

• Lewis Model explains how unlimited labour from agriculture moves to modern industry.

• Capitalist sector reinvests surplus, driving job creation and growth.

• Model continues until surplus labour is absorbed, then wages rise, and growth slows.

• Major criticisms: unrealistic assumptions, ignores technology, and complex migration dynamics.

🧠 Flowchart: Lewis Model of Unlimited Labour

scss

[Subsistence Sector]

↓

(Surplus Labour)

↓

[Capitalist Sector (Pays Higher Wage)]

↓

[Labour Shifts]

↓

[Surplus Generated = MPL - Wage]

↓

[Surplus Reinvested → More Capital → More Jobs]

↓

[Labour Absorption Continues]

↓

[Surplus Labour Exhausted → Wage Rises]

↓

[End of Growth Process]