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LEWIS THEORY OF LEWIS THEORY OF UNLIMITEDUNLIMITED

SUPPLY OF LABOURSUPPLY OF LABOUR

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Lewis Theory of DevelopmentLewis Theory of Development Prof. Lewis Offers a model of Prof. Lewis Offers a model of

growth based on existence of growth based on existence of disguised unemployment in less disguised unemployment in less developed countries. It is developed countries. It is propounded in his propounded in his work,”Economic development work,”Economic development with Unlimited Supply of Labour”.with Unlimited Supply of Labour”.

Also known as the two-sector Also known as the two-sector surplus labor model surplus labor model

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AssumptionsAssumptions

The main assumptions of this model:The main assumptions of this model: Because of the high density of population in less Because of the high density of population in less

developed countries, many people are disguisedly developed countries, many people are disguisedly unemployed. Marginal productivity of these people is unemployed. Marginal productivity of these people is zero.zero.

The supply of labour is perfectly elastic at the The supply of labour is perfectly elastic at the subsistence rate of wages. subsistence rate of wages.

Less developed economies are dual economies. There Less developed economies are dual economies. There is coexistence of capitalist sector and subsistance is coexistence of capitalist sector and subsistance sector.sector.

Wage rate is higher in the capitalist sector compared to Wage rate is higher in the capitalist sector compared to subsistence sector, wage rate stagnates at the subsistence sector, wage rate stagnates at the subsistence levelsubsistence level

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Features of the basic modelFeatures of the basic model: : Economy consists of two sectors- Economy consists of two sectors-

traditional and moderntraditional and modern Traditional sector has surplus of Traditional sector has surplus of

labor (MPlabor (MPLL=0)=0) Model focuses on the process of Model focuses on the process of

transfer of surplus labor and the transfer of surplus labor and the growth of output in the modern growth of output in the modern sectorsector

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Lewis Theory of DevelopmentLewis Theory of Development

The process of self-sustaining The process of self-sustaining growth and employment expansion growth and employment expansion continues in the modern sector continues in the modern sector until all of the surplus labor is until all of the surplus labor is absorbedabsorbed

Structural transformation of the Structural transformation of the economy has taken place with the economy has taken place with the growth of the modern industrygrowth of the modern industry

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Lewis Theory of Development: Lewis Theory of Development: CriticismsCriticisms

Four of the key assumptions do not fit the realities Four of the key assumptions do not fit the realities of contemporary developing countries of contemporary developing countries

Reality is that:Reality is that: Capitalist profits are invested in labor saving technology Capitalist profits are invested in labor saving technology Existence of capital flightExistence of capital flight Little surplus labor in rural areasLittle surplus labor in rural areas Growing prevalence of urban surplus labor Growing prevalence of urban surplus labor Tendency for industrial sector wages to rise in the face of Tendency for industrial sector wages to rise in the face of

open unemployment open unemployment

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