Theory of Economic development with Unlimited Supplies of Labor

Theory of economic development with unlimited supplies of labor

It is a classical model of a dual economy. It is a long run structural change theory which explains the mechanism of changing structure of under developed economies from subsistence agriculture sector to capitalistic modern industrial sector.

The economic development depends upon capital accumulation due to unlimited supply of labor. He tries to revive the classical model and had firmly stressed that classical assumption of unlimited supply of labor is more relevant conditions prevailing in majority of UDCs. The model that excess labor in agriculture sector is an engine of development.

1.      Economy is dualistic in nature

Professor Lewis has divided an economy into two sectors, capitalistic sector or modern sector and the subsistence sector.

a)      Capitalist sector is defined as the part of economy which uses reproducible capital and pays capital for the use of thereof and employs wage labor for making process. The distinguishing feature of capitalist sector is the hiring of labor and sale of its output for a profit, which can be undertaken by public enterprises as well as private. This sector is characterized by high productivity modern urban industries into which labor from subsistence is gradually transferred. People are literate advance and skilled in the capitalist sector. He assumes that supply of unskilled labor in this sector is unlimited.

b)      The agricultural sector/subsistence sector: The subsistence sector is that part of the economy which does not use reproducible capital. It is the typical indigenous traditional sector or the self-employment sector characterized by low average productivity of labor and lower output per head than that in capitalist sector. As variable land being fixed the marginal product of labor diminishes is zero or negligible at subsistence sector, with the increase in population over time. People   are generally backward illiterate, unskilled and simple at subsistence sector.

This sector is overpopulated characterized by infinitely elastic supply of labor at the given wage rate. Thus it is possible to withdraw labor from this sector without any loss of output. He classifies this sector as surplus labor sector

2.      Lewis assumes that urban wages are at least 30%higher than the average rural income to induce workers to migrate from their home areas. He adds reason for the existence of the wage gap. One of the reason is the cost of living in the urban sector is almost invariably empirically true that, even in real terms urban wages are above the rural wages. This happens due to psychological cost of transferring from the easy going life at subsistence sector to more regimented or urbanized environment.

3.      Lewis has assumed perfect competition in modern sector- labor market giving fixed wage rate and horizontal supply curve of labor. On the other wage rate in the traditional sector is given by average productivity of labor while wage rate at urban sector is given accordance with marginal product of labor. 

1.      The cost of importing training and skill to the unskilled labor assumed to be remaining constant through constant through time. Lewis observes that skill can only be a quasi bottle neck for the process because it is very temporary bottleneck and if capital is available for development, the capitalist will provide facilities for training more skilled people.

2.      The production in the expanding capitalist sector takes place according to the principle of profit maximization. The capitalists sector operates by employing the reproducible capital and wage labor.

The magnitude of investment in capitalist sector is not absolutely larger in relation to population growth .i.e