Lewis Model of Unlimited Supply of Labor:

The Nobel Laureate, W. Arthur Lewis in the mid 1950s presented his model of unlimited supply of labor or of surplus labor economy. By surplus labor it means that part of manpower which even if is withdrawn from the process of production there will be no fall in the amount of output.

Assumptions of the Lewis Model:

Lewis model makes the following assumptions:

(i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.

(ii) The subsistence sector does not make the use of 'Reproducible Capital', while the modern sector uses the produced means of capital.

(iii) The production in the advanced sector is higher than the production in traditional and backward sector.

(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor.

The followings are the sources of unlimited supply of labor in UDCs.

(i) Because of severe increase in population more, than required number of labors are working with lands, the so called disguised unemployed.

(ii) In UDCs so many people are having temporary and part time jobs, as the shoe-shines, loaders, porters and waiters etc. There will be no fall in the production even their number are one halved.

(iii) The landlords and feudals are having an army of tenants for the sake of their influence, power and prestige. They do not make any contribution towards production, and they are prepared to work even at less than subsistence wages.

(iv) The women in UDCs do not work, but they just perform house-hold duties. Thus they also represent unemployment.

(v) The high birth rate in UDCs leads to grow unemployment.

Lewis model is a classical type model which states that the unlimited supplies of labor can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agri. to traditional sector. This can be done by transferring the labor from traditional sector and modern sector.

Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn 'surplus'. Such surplus will be re-invested in the modern sector leading to absorb the labor which are migrated from subsistence sector. In this way, the surplus labor or the labor which were prey to disguised unemployment will get the employment. Thus both the labor transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.

Figure/Diagram:

The process of migration and capital formation is shown with the help of fig (a).

In the fig., the production function regarding traditional sector has been demonstrated. Here in the upper part of the fig., by employing LF of labor, the OT of food production has been produced, while the amount of capital is fixed here. In the lower part of figure we have APL and MPL in the subsistence farming sector which have been derived from the TPF curve in the upper part of the fig. This is the behavior of a UDC where 80% to 90% of population lives and works in rural areas.

Lewis makes two assumptions regarding traditional sector:

(i) There is surplus labor because MPL = 0 (as MPLF curve cuts x-axis).

(ii) All rural workers share equally in the output so that rural real wage is determined by the APL, and not by MPL. Thus it is OA, which has been attained by dividing OT by OLF labor in subsistence sector.

In the fig (b)  the upper segment we have the production functions regarding modern industrial sector. In case OL, labor are employed, having the production function TPM(K₁), TP₁ is being produced. In the lower segment of fig., the demand for labor is D₁(K₁) at the constant wages (OW) which are 30% higher than the average rural wages.

In the Lewis model, the modern sector capital stock is allowed to increase from K₁ to K₂ and K₃ as a result of reinvestment of profits by capitalist industrialists. This causes the TP curve in the upper part of fig., to shift upward from TPM(K₁) to TPM(K₂) and to TPM(K₃). The process that will generate these capitalistic profits for reinvestment and growth is illustrated in the lower part of fig. (b). The modern sector MPL curves have been derived from the TPM curves of the upper part of the fig. (b). These curves are demand for labor curve because of assumption of perfect competition.

The OA in both lower parts of fig (a) and (b) represents the average level of real subsistence income in the traditional rural sector. But in the modern sector the real wages have been represented by OW (the 30% higher than rural wages).

At such wages the supply of rural labor is assumed to be unlimited or perfectly elastic as shown by WSL curve in fig (b). This means that modern sector employer can hire as much labor as he likes without any fear of rise in wages. It is also told that in traditional sector the supply of labor is in the millions, while the employment in modern sector is in thousands. In the modern sector the employment is made by the employer to the point where MPL = W. (the point F in the lower part of fig. (b). Thus the basic employment is OL₁, with this employment of labor CD₁FL, output in manufacturing sector is being produced. While the share of such employed labor will be OWFL₁.

The balance of output shown by the shaded area WD₁F would be the total profits (surplus) that accrue to the capitalists. As Lewis assumes that all of these profits are reinvested, the total stock of capital in the modern sector will rise from K₁ to K₂. As a result, TPM will shift from TPM(K₁) to TPM(K₂) which in a turn leads to increase MPL. In other words, the demand for labor will increase as shown by the curve D₂(K₂) in the lower part of fig (b).

Now the new equilibrium in the modern sector takes place at point G where OL₂ labor are being employed. The total output rises to OTP₂ or OD₂GL₂ while total wages and profits increase to OWGL₂ and WD₂G, respectively. Once again, these larger (WD₂G) profits are reinvested, the total stock of capital will increase to K₃. Again the TP curve will shift upward, as the TPM(K₃), and demand for labor curve will shift to D₃(K₃).

This process of modern self sustaining growth and employment expansion will remain continue till all the surplus rural labor is absorbed in the new industrial sector. There after, additional workers can be withdrawn from agri. sector only at a higher cost of lost food production because this will decrease the labor to land ratios. In this way, the MPL will be no more zero. Here, labor supply curve will become positively sloped along with the growth of modern sector. The structural transformation of the economy will take place through shifting traditional rural agriculture to modern urban industry.

Criticism on the Lewis Model:

Although Lewis two-sector development model is simple and roughly it is in conformity with the historical growth in the West, but it has following flaws and most of its assumptions do not fit in the institutional and economic realities of UDCs.

(i) Proportionality Between Employment Creation and Capital Accumulation: Lewis model assumes that there exists a proportionality in the labor transfer and employment creation in modern sector and rate of capital accumulation in the modern sector. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and faster the rate of new job creation.

But if the capitalists reinvest their profits in the labor-saving capital equipment rather increasing the labor employment (what has been assumed in Lewis model) the jobs will not be created and modern sector will not expand. This happened in case of Pakistan where during 2nd five year plan, the wages remained constant and the capitalists rather re-ploughing their surplus shifted it to the 'Swiss Banks'. All this led to a resentment against the strategy of increasing the surpluses of capitalistic class. Now we employ a diagram where we shall show that labor demand curves do not shift uniformly outward. It is so because that increase in capital stock will embody labor saving technology.

In fig., it is obvious that even though the total output has grown substantially, i.e., OD₂ EL* > OD₁EL*. But the total wages remained OWEL* and the employment also remained OL* . Both remained unchanged. All of increase in output has accrued to capitalists in the form of excess profits. This may be given the name of "Anti-development" economic growth, all the extra income and output growth went to a few capitalists while the income and employment levels for the masses of workers remained unchanged. In this way, total GNP would rise,

but there would be no or little improvement in aggregate social welfare.

(ii) Peak Harvesting and Sowing Season: Lewis did not pay attention to the pattern of seasonality of labor demand in traditional agri. sector. According to Mehra, labor demand varies considerably and such demand is at its peak during the sowing and harvesting season. Thus during some months of the year the MPL may be above-zero. In such situation, the positive opportunity costs will involve in transferring the labor from agri. sector. As a result, the labor transfer will reduce agri. output.

(iii) Rise in Urban Wages: According to Prof. Mabro the absorption of surplus labor itself may end pre-maturely because competitors (producers) may alter wage rates and lower the share of profit. It has been shown that rural-urban migration in Egyptian economy was accompanied by increase in wage rate of 15% and a fall in profits by 12%. Moreover, the wages in industrial sector were forced up directly by unions, civil service wage scales, minimum wage laws and MNCs (multi-national corporations) hiring practices tend to negate the role of competitive forces in the modern sector labor market. Again, the wages in subsistence sector may go up indirectly through rise in productivity in this sector.

(iv) Full Impact of Growing Population: Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e., its effects on agri. surplus, the capitalist profit share, wage rates and overall employment opportunities. Similarly, Lewis assumed that the rate of growth in manufacturing sector would be identical to that in agri. sector. But, if industrial development involves more intensive use of capital than labor, then the flow of labor from agri. to industry will simply create more unemployment.

(v) Ignoring the Balanced Growth: Lewis ignored the balanced growth between agri. sector and industrial sector. But we know that there, exists a linkage between agri. growth and industrial expansion in poor countries. If a part of profits made by capitalists is not devoted to agri. sector, the process of industrialization would be jeopardized (perhaps, due to reduced supply of raw material). Because of this flaw, Ranis-Fei model considers the balanced growth of both sectors. This will be discussed after this model.

(vi) Ignoring the Role of Leakages: Lewis has ignored the role which the leakages can play in the economy. As Lewis assumed that all of increase in profits are diverted into savings. It means that savings of producers are equal to one. But, practically it is not so. The increase in profits may accompany the increase in consumption. As in Pakistan during 2nd plan the capitalistic class diverted their increased profits to palacious houses and conspicuous consumption. In such tike situation the MPS out of profits will be less than one.

Again, it is not necessary that the capital formation will be made by the capitalistic class. The same may be done by the farmers producing cash crops. As the small farmers producing cash crops in Egypt have shown themselves to be quite capable of saving the required capital. Again, the World's largest Coca industry in Ghana is the result of creation of small enterprise capital formation.

(vii) Process of Migration is Neither Smooth Nor Costless: Lewis assumed that the transfer of unskilled labor from agri. to industry is regarded as almost smooth and costless. But, practically it is no so as industry requires different types of labor. If this problem is removed with the help of investment in education and skill formation, the process of migration will become costlier and expensive.

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