LEWIS THEORY OF UNLIMITED SUPPLY OF LABOUR .

Lewis Theory of Development Prof. Lewis Offers a model of growth based on existence of disguised unemployment in less developed countries. It is propounded in his work,”Economic development with Unlimited Supply of Labour”. Also known as the two-sector surplus labor model

Assumptions The main assumptions of this model: Because of the high density of population in less developed countries, many people are disguisedly unemployed. Marginal productivity of these people is zero. The supply of labour is perfectly elastic at the subsistence rate of wages. Less developed economies are dual economies. There is coexistence of capitalist sector and subsistance sector. Wage rate is higher in the capitalist sector compared to subsistence sector, wage rate stagnates at the subsistence level

Features of the basic model: Economy consists of two sectors- traditional and modern Traditional sector has surplus of labor (MPL=0) Model focuses on the process of transfer of surplus labor and the growth of output in the modern sector

Lewis Theory of Development The process of self-sustaining growth and employment expansion continues in the modern sector until all of the surplus labor is absorbed Structural transformation of the economy has taken place with the growth of the modern industry

Lewis Theory of Development: Criticisms Four of the key assumptions do not fit the realities of contemporary developing countries Reality is that: Capitalist profits are invested in labor saving technology Existence of capital flight Little surplus labor in rural areas Growing prevalence of urban surplus labor Tendency for industrial sector wages to rise in the face of open unemployment

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