Chapter 5
.Draw and label the Lewis Dual Sector Model
showing both the traditional (agricultural) and
modern (industrial) sectors.
0NPM = TOTAL PRODUCT
WNP = Capitalist surplus
🌾 Main Idea of the Lewis Model
The model explains how developing economies grow by moving workers from
the traditional (agricultural) sector to the modern (industrial) sector.
In early stages, there is surplus labour in agriculture — many people work but
produce very little (disguised unemployment).
These extra workers can move to the industrial sector without reducing total
farm output.
⚙️How the Process Works
1. Wages stay constant at first:
o Industrial wages are a bit higher than subsistence (farm) wages, but they
remain constant while there’s surplus labour.
o This attracts workers to factories.
2. Profit and Reinvestment:
o Industrialists (capitalists) earn profits (since output grows faster than
wages).
o They reinvest profits in new factories → creates more jobs → draws more
workers from agriculture.
o As this continues, the capitalist surplus (profits) and total output
grow.
3. Shift in Labour Demand:
o As investment increases, the marginal productivity curve of labour in
industry shifts upward (more output per worker).
o More workers are employed at the same wage rate, expanding the
industrial sector.
⚖️The Lewis Turning Point
Eventually, the surplus labour in agriculture is used up.
At this stage:
o The supply of labour to industry is no longer unlimited.
o Wages begin to rise because farmers now compete to keep workers.
o This point is called the Lewis Turning Point.
🚜 Challenges and Limitations
If agriculture doesn’t grow fast enough, food prices rise → higher living costs
→ reduced industrial profits.
Rising food prices or union demands may also push wages up earlier than
expected.
If profits aren’t reinvested (spent on luxury goods instead), industrial growth
slows.
So, the model’s success depends on:
1. Profits being reinvested.
2. Agricultural productivity improving.
3. Population growth not outpacing job creation.
📈 Outcome
In the early stages: economic growth is driven by moving labour to more
productive industries while wages stay stable.
Later, when surplus labour disappears, wages rise and growth depends on
capital accumulation and technological progress.
Labour and Output Changes in the Lewis Model
1. Movement of Labour
In the early stages of development, the traditional (agricultural) sector has
surplus labour — too many workers producing little extra output.
These extra workers can move to the modern (industrial) sector without
reducing agricultural output, because their productivity in agriculture is
almost zero.
The industrial sector offers a slightly higher wage than the subsistence
wage in agriculture, attracting workers.
2. What Happens to Output
As workers move to the modern sector:
o Industrial output increases because labour is more productive in
industry.
o Total national output (GDP) rises since workers are now producing
more goods and services.
The traditional sector’s output remains roughly constant at first, because
the workers leaving were part of the surplus.
Over time, as more workers move out and the surplus labour is used up,
agricultural output may start to fall slightly.
3. Wages and Productivity
At first, wages remain constant (industrial wages are fixed slightly above the
subsistence level).
Profits in the industrial sector rise as output increases faster than wages.
These profits are reinvested, leading to more capital formation and expansion
of the industrial sector — allowing it to employ even more workers.
4. The Lewis Turning Point
Eventually, when all surplus labour from agriculture is absorbed, the labour
supply becomes scarce.
Wages in both sectors begin to rise, and further movement of labour becomes
more costly.
After this point, economic growth depends more on capital accumulation and
productivity improvements, not just labour transfer.
✅ In summary (Thirlwall):
As surplus labour moves from the traditional to the modern sector, total output and
productivity rise. The economy grows because workers shift from low-productivity to
high-productivity employment, while profits in the modern sector are reinvested to fuel
further expansion — until the surplus labour is exhausted.
Using a diagram, show how surplus labour in the traditional
sector leads to disguised unemployment.
2. Surplus Labour and Disguised Unemployment in the Traditional Sector
In the traditional agricultural sector:
Many workers share limited land and tools, so adding more workers does not
increase total output.
These extra workers are surplus labour — their marginal product is zero
(they add nothing to total production).
They appear to be employed, but their work does not increase output — this is
called disguised unemployment.
3. How This Links to the Lewis Model
Because of surplus labour, the supply of labour to the industrial sector is
perfectly elastic at a constant wage (W).
The industrial sector can hire as many workers as needed at that wage without
pushing up wages, because plenty of surplus labour exists in agriculture.
As workers move from agriculture to industry, agricultural output stays the
same (since those workers were not contributing to extra production).
Industrial output increases — raising total national output.
4. On the Diagram
At point P, the industrial sector employs OM workers at wage W.
If profits are reinvested, the marginal product curve shifts to N₁R₁, allowing
the sector to employ M₁ workers.
The new workers (MM₁) come from the surplus labour pool in agriculture —
workers who were previously in disguised unemployment.
✅ In summary (Thirlwall):
Surplus labour in the traditional sector means many people work but produce no extra
output (disguised unemployment). As the modern industrial sector expands, it can
absorb these surplus workers at a constant wage, increasing overall production
without reducing agricultural output — until all surplus labour is used up.
Describe the process through which wages remain constant
in the early stages of industrialisation in the Lewis model.
In the early stages of industrialisation, wages remain constant because of the large
pool of surplus labour in the traditional sector. The industrial sector can expand by
drawing workers at a fixed wage slightly above the subsistence level. Only when
surplus labour is exhausted do wages begin to rise — marking the Lewis Turning Point.
Explain what is meant by disguised unemployment and
how it can be measured in developing economies.
1. Meaning of Disguised Unemployment
Disguised unemployment means that more people are employed than
actually needed to produce a given level of output.
It is a form of hidden or surplus labour, common in the traditional
(agricultural) sector of developing countries.
These workers appear to be working, but their marginal productivity is zero
— removing them from work would not reduce total output.
🧩 Example:
If 10 people work on a small family farm, but the same output could be produced by 6
workers, then 4 workers are in disguised unemployment.
2. Causes of Disguised Unemployment
Low productivity in agriculture due to limited land and tools.
Lack of alternative jobs in non-agricultural sectors.
Population pressure on land in rural areas.
Underemployment — people working part-time or on very low productivity
tasks.
3. How It Appears in the Lewis Model
The traditional sector has surplus labour — many workers with zero marginal
product.
These surplus workers can move to the industrial sector without reducing
agricultural output.
This labour transfer helps start the process of industrialisation and
economic growth.
Measurement of Disguised unemployment
Disguised unemployment = difference between actual workers available and the
amount of employment needed to make the marginal product = subsistence
wage. (A - S). This is the definition of unlimited supplies of labour in Lewis’s model.
Static Surplus (A – D)
Measures the gap between actual workers available and the amount of
employment needed for output where marginal product = zero.
Dynamic Surplus
Measures the difference between actual workers available and labour required
if production methods improved slightly, at which MPL would be zero. (A -
U)