Lewis model

It is regarding Unlimited supplies of labour which is the idea regarding development of underdeveloped countries

1. THE THEORY OF UNLIMITED SUPPLY OF LABOUR (LEWIS MODEL) Sr.Sindhu P.J ( Sr.Sharin CTC)

2.  Prof. William Arthur Lewis ‘Economic Development with Unlimited Supplies of Labour ” Published in 1954 Lewis divides the economy in an underdeveloped country in two sectors namely the Subsistence sector and the capitalist sector. The "Dual Sector Model" is a theory of development in which surplus labor from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labour , promotes industrialization and stimulates sustained development.

3. CAPITALIST SECTOR

4. The capitalist sector The manufacturing sector of the economy. Lewis defined this sector as "that part of the economy which uses reproducible capital and pays capitalists thereof". The use of capital is controlled by the capitalists, who hire the services of labour . It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public. The capitalist manufacturing sector is characterised by higher wage rates , higher marginal productivity, and a demand for more workers. The capitalist sector is assumed to use a production process that is  capital  intensive , so investment and capital formation in the manufacturing sector are possible over time as capitalists' profits are reinvested in the capital stock.

5. SUBSISTENCE SECTOR

6. The agricultural sector of the economy. "that part of the economy which is not using reproducible capital". It is the indigenous traditional sector or the "self employed sector". The per head output is comparatively lower in this sector and this is because of lack of capital. In the model, the subsistence agricultural sector is typically characterized by low wages, an abundance of labour, and low  productivity  through a labour-intensive production process. Improvement in the marginal productivity of labour in the agricultural sector is assumed to be a low priority as the hypothetical developing nation's investment is going towards the physical capital stock in the manufacturing sector. The subsistence sector

7. Assumptions The model assumes that a developing economy has a surplus of unproductive labour in the agricultural sector. These workers are attracted to the growing manufacturing sector where higher wages are offered. It also assumes that the wages in the manufacturing sector are more or less fixed. Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate. The model assumes that these profits will be reinvested in the business in the form of fixed capital. An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.

8. Movement of labour When the capitalist sector expands, it extracts or draws labour from the subsistence sector. This causes the output per head of labourers who move from the subsistence sector to the capitalist sector to increase. Since Lewis in his model considers overpopulated labour surplus economies he assumes that the supply of unskilled labour to the capitalist sector is unlimited. This gives rise to the possibility of creating new industries and expanding existing ones at the existing wage rate. The capitalist sector gives a slightly higher wage than the subsistence wage in order to compensate labour for the friction of moving and induce labour to leave the traditional way of life. This wage is called the ‘ subsistence plus wage and it is according to Lewis, usually 30% higher than the subsistence wage.

9. GRAPHICAL REPRESENTATION OF THE THEORY

10. It is worth mentioning that in Lewis Model, the rate of accumulation of industrial capital and, therefore, the absorption of surplus labour depends upon the distribution of income. With the aid of classical assumption that all wages are consumed and all profits saved, Lewis shows that the share of profits and therefore rate of saving and investment will rise continuously in the modern sector and capital will continue to be expanded until all the surplus labour has been absorbed. Rising share of profits serves as an incentive to reinvest them in building industrial capacity as well as a source of savings to finance it.

11. The process of economic growth is linked to the growth of capitalist surplus, that is profit. As long as the capitalist surplus increases, the national income also increases raising the growth of the economy. The increase in capitalist surplus is linked to the use of more and more labor which is assumed to be in surplus in case of this model. This process of capital accumulation does come to an end at some point. End of growth process

12. This point is where capital accumulation catches up with population so that there is no longer any surplus labor left. Lewis says that it is the point where capital accumulation comes to a stop can come before also that is if real wages rise so high so as to reduce capitalists' profits to the level at which profits are all consumed and there is no net investment.

13. This can take place in the following ways: If the capital accumulation is proceeding faster than population growth which causes a decline in the number of people in the agricultural or subsistence sector. The increase in the size of the capitalist or industrial sector in comparison to the subsistence sector may turn the  terms of trade  against the capitalist sector and therefore force the capitalists to pay the workers/laborers a higher percentage of their product in order to keep their real income constant. The subsistence sector may adopt new and improved methods and techniques of production, this will raise the level of subsistence wages in turn forcing an increase in the capitalist wages. Thus both the surplus of the capitalists and the rate of capital accumulation will then decline. Even though the productivity of capitalist sector remains unchanged, the workers in the capitalist sector may begin to imitate the capitalist style and way of life and therefore may need more to live on, this will raise the subsistence wage and also the capitalist wage and in turn the capitalist surplus and the rate of capital accumulation will decline

14. (1) The assumption that disguised unemployment exists in the agriculture sector has not been accepted by many economists. Schultz, Viner , Heberler and Hopper are a few of such economists. According to them, the production in the subsistence sector will be affected when labour is withdrawn from it. (2) Lewis ignored the cost involved in training the unskilled worker transferred from the subsistence sector. Even if it is obtained at a constant wage rate, so for as its transfer from the subsistence sector is concerned, the supply curve may slope upwards so far as the capitalist, sector is concerned if the cost of training rises as more and more labour is transferred. Critical Review of the Lewis’s Model:

15. (3) When labour is transferred from the subsistence sector share of agricultural output falling to each one left in the agricultural sector will go a rising. This means the institutional wage will go on rising with every transfer and so will be the wages paid in the capitalist sector. (4) The model assumes that, besides labour, there is unlimited supply of entrepreneurs in the capitalist sector. This is not true in the case of many of the underdeveloped countries. (5) It is wrong to assume that a capitalist will always re-invest their profits. They can to indulge in un-productive pursuits. They can use their profits for speculative purposes. (6) It is also wrong to assume that landlords always squander away their savings. The role of landlords of Japan in industrialisation of the country is well known. (7) The model assumes that there already exists a market for the industrial products in the country. This is wrong. People of an underdeveloped country may not be able to purchase the products perturbed by the expanding capitalist sector. Foreign markets, too, may not be available to the capitalist sector in the beginning.