Features of Lewis Model of Unlimited Supply of Labour | Economics Optional Notes for UPSC PDF Download

Two Sector Economy or Dual Economy

• W.A. Lewis believes that most of the underdeveloped countries of the world live under a heavy pressure of population due to rapid growth of population.
• In such economies, unlimited supply or surplus supply of labour is available at a subsistence wage.
• According to Lewis underdeveloped countries have the dual economy and hence can be divided into two sectors:
  (i) The capitalist sector, and
  (ii) The subsistence sector.
• The capitalist sector is that part of the economy which uses reproducible capital and pays capitalists for the use thereof. The use of capital is controlled by capitalist sector which hires the services of the labourers. It may be either private or public. The average wages are quite high. The people are generally advanced, literate, sophisticated and skilled in the capitalist sector. They employ labourers for wages in mines, factories and plantations etc. for earning profits. The output per head is high. On the other hand, the subsistence is that part of the economy which does not use reproducible capital.
• In this sector, the output per head is quite low as compared to the capitalist sector. The average productivity of labour is low and people are generally backward, illiterate, and unskilled. Thus, there are less similarities between the two sectors and the development is lopsided.
• Under the above circumstances, the main problem is to provide gainful employment to the unlimited supplies of labour. It requires greater attention in development and expansion of subsistence sector. In his own words, “The central problem in the theory of economic development is to understand the process by which a community, which has previously, earning and investing 4 or 5 per cent of its national income or less, converts itself into an economy, where the voluntary savings are running about 12 to 15 per cent of the national income or more”.
• Thus, it is clear that gainful employment can be provided to unlimited labour force when rate of investment is at least 12 to 15 per cent of the national income. In order to provide employment to the unlimited supply of labour or surplus labour new industries can be set up or existing industries expanded without limit at the current wage rate by drawing up labour from the subsistence sector or the subsistence wage.
• The main source from labourers would be coming for employment at the subsistence wage as economic development proceeds at “the farmers, the casuals, the petty traders, the retainers (domestic and commercial) women in the household and population growth”. It implies the mobilisation of labour from the subsistence sector where the marginal productivity of labour is quite low to the capitalist sector where the wages are high and the marginal productivity of labour is also high.
• According to Lewis, the capitalist sector needs skilled workers for its expansion and the supply of this type of labour cannot be regarded unlimited in these countries. In this connection, Lewis argued that skilled labour is only a quasi bottleneck a temporary bottleneck which can be removed by providing training facilities to unskilled labour.

Capitalist Surplus

• Now, how the unlimited supply of labour is converted into capitalist surplus which is an essential prerequisite of growth. The main objective of capitalists is to’ maximize their profits. The capitalist surplus is the difference between the marginal productivity of labour and the capitalist wage. The capitalist sector starts drawing labour from the subsistence sector on account of higher wages.
• Their contribution to output is also higher despite higher wages. In this way surplus is generated in the capitalist sector. Lewis termed this surplus as the ‘capitalist surplus’. The capitalist surplus is reinvested in the new capital assets by the entrepreneurs. It leads to capital formation in the economy. This investment creates new jobs for the unemployed labourers withdrawn from the subsistence sector. The supply of labour is supposed to be perfectly elastic at the capitalist wage rate. Thus, the labourers continue to be available at the existing capitalist wage rate.
• Thus the circular process of surplus generation, increased investment and increased demand for labour continues to steer the system out of the state of underdevelopment. In short, the process of economic development continues till the capital labour ratio rises and the supply of labour becomes inelastic, and surplus labour disappears. Thus the capitalist formation depends on the capitalist surplus.

Diagrammatic Representation

Lewis theory of unlimited supply can be explained in the following diagram:

• In the diagram, quantity of labour employed is shown on axis-OX and the marginal productivity has been shown on axis-OY. OS is the wage rate in the subsistence sector and OW is the wage rate in capitalist sector.
• The supply of labour is unlimited, as shown by the horizontal supply curve of labour WW. At the start when OE¹ labour is employed in the capitalist sector, its marginal productivity curve is A’D¹ and the total output of this sector is OA’b’E¹. Out of this labourers are paid wages equal to the area OWB’E¹.
• The remaining area WA’B¹ shows surplus output. This is the capitalist surplus or total profit earned by the capitalist sector. As this surplus is reinvested, the curve of marginal productivity shifts upward to A²D². The capitalist surplus and employment are now larger than before being WA²B² and OE² respectively reinvestment raises the marginal productivity curve and the level of employment to A^,3D³ and OE³ so on, till the entire surplus is absorbed in the capitalist sector. After this, the supply curve will slope from left to right upwards like an w ordinary supply curve, and wagesand employment will continue to rise.
  
• According to Lewis, the technical progress may be recognized as capital saving device and labour saving device. In both ways, the technical progress tends to enhance profits or capitalist surplus and employment in the capitalist sector.