Lewis Two-Sector Model: Sustaining Economic Growth Through Labor Transfer

 
LEWIS’S MODEL OF UNLIMITED
SUPPLY  OF LABOUR
 
Agriculture
(Traditional 
)
 
Sector
Surplus of
 
labo
u
r
 
Industrial
(Modern)
 
Sector
Capture 
the 
excess
 
labo
u
r
Transfer 
of 
surplus
 
labo
u
r
 
 
Lewis 
Two 
Sector
 
Model
 
ASSUMPTIONS
 
The model assumes that a developing economy has a
surplus of unproductive labor 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.
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.
Real wage is determined by the average and not the
marginal product of labour.
 
How the 
Model 
Argues
to 
Sustain 
Economic
 
Growth
 
Lewis 
Two 
Sector
 
Model
 
Increases
in 
output,
wages
 
and
profit
 
Larger
profit
i
n
v
e
s
t
ed
 
Output
e
xpanded
 
A
b
sorb
surplus
labor
 
Emp
l
o
yme
nt
increases,
 
Economy
capable
 
of
self 
-
sustaining
growth
 
How 
it 
Contribute 
to 
Economic
 
Growth
 
Total 
output 
rises while 
total 
wages 
and  
profits
increase.
 
The 
larger area 
of 
profits 
will be 
invested
 
in 
expanding
production.
 
Modern 
sector expands absorbs pool of  
surplus
labor.
 
Increasing 
the 
total 
capital 
stock, 
shifting 
the 
total  
product
and labor 
demand curves, 
and 
raising 
the  
level 
of modern-
sector
 
employment.
 
Economy 
capable of self-sustaining  
growth.
undefined
 
St
r
en
g
th
 
Balance 
growth
 
between
2 
sectors
 
(dualism)
 
The 
model 
had
implication 
for
 
income
distribution
 
The 
model applied 
to
labor 
movement across
countries, 
along with
movements 
among
 
two
sectors 
in the closed
economy
 
Weakness
The 
notion 
of 
an
exogenous 
unskilled
agricultural 
real
 
wage
 
“Labor surplus” 
was
interpreted 
as 
zero
marginal 
productivity
 
of
agricultural
 
labor
 
Surplus 
exist 
in 
rural
 
area
is 
not valid
 
Dualism
 
in
the
 
Model
 
Application
 
Pros
 
&
Cons
 
In
 
Reality
 
Conclusion
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Lewis Two-Sector Model, based on the assumption of surplus labor in agriculture, explains how transferring labor to the industrial sector boosts economic growth. The model highlights the shift from traditional to modern sectors, increased output, wages, and profits, and self-sustaining growth capabilities. Despite its strengths in promoting growth, the model has limitations related to dualism and income distribution implications. Overall, it provides insights into balancing sectoral growth for developing economies.


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  1. LEWISS MODEL OF UNLIMITED SUPPLY OF LABOUR

  2. Lewis Two Sector Model Transfer of surplus labour Agriculture Industrial (Traditional ) Sector (Modern)Sector Capture the excesslabour Surplus of labour

  3. ASSUMPTIONS The model assumes that a developing economy has a surplus of unproductive labor 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. 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. Real wage is determined by the average and not the marginal product of labour.

  4. How the Model Argues to Sustain Economic Growth

  5. Lewis Two Sector Model

  6. Increases in output, wagesand profit Employment increases, Larger profit invested Economy capableof self - sustaining growth Absorb surplus labor Output expanded

  7. How it Contribute to Economic Growth Total output rises while total wages and profits increase. The larger area of profits will be invested in expanding production. Modern sector expands absorbs pool of surplus labor. Increasing the total capital stock, shifting the total product and labor demand curves, and raising the level of modern- sector employment. Economy capable of self-sustaining growth.

  8. Strength Weakness Balance growthbetween 2 sectors(dualism) The notion of an exogenous unskilled agricultural realwage The model had implication forincome distribution Labor surplus was interpreted as zero marginal productivityof agriculturallabor The model applied to labor movement across countries, along with movements amongtwo sectors in the closed economy Surplus exist in ruralarea is not valid

  9. Conclusion Dualismin theModel Pros& Cons Application InReality

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