Core understanding of Lewis Theory Prof.Lewis offers a model of role based on existing of disguised unemployment in less developed countries .it is propounded in his work, “economic development with unlimited supply of labour ’’

1. Presented by :
• Abin Karki
Date of Submission :12-03-2076
Submitted to :
• Pramila Maharjan
(Rural Development)
Depart of rural development

2. Acknowledgement
The success and final outcome of this assignment required a lot of guidance and assistance
from many people and we extremely fortunate to have got this all along the completion of our
assigned work. Whatever we have done is only due to such guidance and assistance and we
could not forget to thank them. We respect and thank Mrs.Pramila mam for giving us
opportunity of assignment and providing us support and guidance which made us complete
the assignment on time.
We are extremely grateful as we managed to complete the assignment on given time with
lots of support and guidance. This assignment could not be completed without the efforts and
co-operations of all group members. Last, but not the least we would like to express our
gratitude to our friends and respondents for support and willingness to spend some time with
us.

3. Introduction
 Prof.Lewis offers a model of role based on existing 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 labour model.
 Lewis has explained the process of the economic extension of the undeveloped economics
consisting of two sector, capitalist sector and the other is subsistence sector.
 The two sectors i.e capitalist and subsistence sector have close inter relationship they have
significant connection between their objectives.

4. Two sectors of economy
 The capitalist sector
Lewis defined this sector as "that part of the economy which uses
reproducible capital and pays capitalists thereof". The use of capital is controlled by the
capitalists, who hire the services of labour. It includes manufacturing, plantations, mines
etc. The capitalist sector may be private or public.
 The subsistence sector
This sector was defined by him as "that part of the economy which is not using
reproducible capital". It can also be adjusted as the indigenous traditional sector or the "self
employed sector". The per head output is comparatively lower in this sector and this is
because it is not fructified with capital.

6. Assumption of theory
 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.
 Entrepreneurs in the manufacturing sector make profit because they charge a price
above the fixed wage rate.
 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.
 It assumes dual character i.e capitalist and subsistence.

7. Relationship between the two sectors
 The primary relationship between the two sectors is that when the capitalist sector
expands, it extracts or draws labour from the subsistence sector.
 This causes the output per head of labourers who move from the subsistence sector to the
capitalist sector to increase.
 Since Lewis in his model considers overpopulated labour surplus economies he assumes
that the supply of unskilled labour to the capitalist sector is unlimited.
 This gives rise to the possibility of creating new industries and expanding existing ones
at the existing wage rate.
 Eventually, the wage rates of the agricultural and manufacturing sectors will equalize as
workers leave the agriculture sector for the manufacturing sector, increasing marginal
productivity and wages in agriculture whilst driving down productivity and wages in
manufacturing.

8. Surplus labour and the growth of the economy
 Surplus labour can be used instead of capital in the creation of new industrial
investment projects, or it can be channeled into nascent industries, which are labour-
intensive in their early stages.
 Although labour is assumed to be in surplus, it is mainly unskilled. This inhibits growth
since technical progress necessary for growth requires skilled labor
 To start such a movement, the capitalist sector will have to pay a compensatory
payment determined by the wage rate that people can earn outside their present sector,
plus a set of other amounts includes the cost of living in the new sector and changes in
the level of profits in the existing sector.
 Since the wages in the capitalist sector depend on the earnings of the subsistence sector,
capitalists would like to keep down productivity/wages in the subsistence sector, so that
the capitalist sector may expand at a fixed wage.

9. Diagrammatically presentation

10. Figure explanation
 The expansion of process of modern sector has been clarified by the diagram. Number
of labour on the OX-axis, marginal productivity and wage rate on OY-axis have been
represented. In the diagram OS indicates production in traditional sector (Here it
represents subsistence wages they get in traditional sector). The labours produce OS on
average in traditional sector . They are paid more wages equal to SW to attract to
modern sector A1D1 line shows marginal productivity of labour .In this situation OW
represents the wage rate of the labour . Modern sector pays OE1, B1M1 ,W in total but
it receives OE1B1A1 income and Saving is WB1A1.Quantity of capital is increased by
reinvestment of this saving because of reinvestment of earned profit. the capacity
economic increase through capital formation in modern sector . Ot helps to absorb the
more labour than previous as a result it can observe OE2 amount of labour . As
unlimited number of a person remain jobless in traditional sector , labours as many as
needed can be found at OW wage rate , which is represented by WW flexible line .
When workers in OE2 quantity are supplied ,OE2B2W goes , as payment of wages and
the rest WB2A2 remains as saving for reinvestment creating needs for supply of
additional labours . In this way Lewis says the gradual increasing in production takes
place as each stage in modern sector and industrial sector goes on expanding wider
making agricultural sector narrower .

11. The Lewis model has attracted attention of underdeveloped countries because it brings
out some basic relationships in dualistic development. However it has been criticized on
the following grounds:
 Unrealistic assumptions
 Limited supply of limited skilled power
 One sided theory
 Lack of entrepreneurs
 Neglect of aggregate demand
 Equal distribution of income
 Migration is not easy task
 Saving are not done by capitalist alone
 Marginal productivity of labour is not zero
 Mobility of labour is not easy
Criticism of Lewis theory

12. Conclusion
 In many economies an unlimited supply of labour is available at a subsistence wage
.this was a graphical model . The neo classical model when applied to such economy
gives erroneous results.
 The main sources from which workers come as economic development proceeds are
subsistence agriculture casual labour , patriate , domestic service, wives and daughter in
the household and increase in population .
 Capital formation and technical progress results not raising wages but in raising in the
set of profit in national income.
 Practically all the benefits of increasing efficiency in export industries goes to foreign
customers where as raising efficiency in subsistence food production would
automatically make commercial produce dearer.