LEWIS MODEL OF ECONOMIC DEVELOPMENT WITH UNLIMITED LABOR SUPPLY
W. Arthur Lewis has presented a theory of economic development with the use of unlimited supply of labor. The supply of labor in under-developed countries generally is perfectly classic at the current wage rate. That is, an unlimited supply of labor is available at the subsistence wage. This unlimited supply of labor i~drawn Unpin surplus agricultural labor domestic servants, women in households, etc In all these sectors, the marginal productivity of labor is negligible or zero.
Some economists contend that there is not much surplus labor actually available for capital formation so as to be useful for economic development. Lewis model is more in accord with this 511 W. Arthur Lewis Goebbels reality. His model Prize in economics. is not based on disguised unemployment but on some other conditions.Rile wage rate in the industrial sector is above its marginal productivity in the subsistence sector by a small but fixed margin. (b) The investment in the industrial Arcturus is not large relative to population growth. (c) The cost of training of the skilled workers is constant.
In his model. Lewis analyses the process of economic development in terms of inter-sector dial relationships in a dual economy composed of a ‘capitalist’ (manufacturing, mining. etc.) Sector and a ‘subsistence sector or the self-employment sector. In an overpopulated country, the capitalist sector draws labor from the subsistence sector of which there is an almost unlimited supply. The wage in the capitalist sector depends on what labor gets/earns in the subsistence sector and is a bit higher so as to attract labor. Hence at this wage, the supply of labor is perfectly elastic which mucus the capitalist sector can have as much labor as it requires. Subsistence wage, in turn, is governed by the conventional view of the minimum required r Ir subsistence or by average product per worker in subsistence agriculture.
Since marginal productivity in the capitalist sector is higher than the current wage rate, it yields a surplus or profits to the capitalist. The surplus is reinvested and creates new capital which ill turn raises the marginal productivity and increases employment in the capitalist sector. This process docs not raise wages but increases the surplus or share of profits in the national income. This process goes on. Profits grow relatively as the capitalist sector expands and capital formation increases .
The following diagram illustrates this process reflecting low productivity is the crucial point both in the demand circle and the supply circle. Of these, the supply end is more difficult to break than the demand end, It is obviously easy to create or increase demand for capital but it is not so easy to make up the deficiency of capital. The country may also suffer from lack of natural resources like water and mineral resources or the poverty of the soil. lout in the matter of economic development. the things of crucial importance arc the small capacity to save and small inducement invest, Other deficiencies can he made up and the handicapper of the natural factor removed, if the problem or capital attenuation is successfully tackled.