Lewis Dual-Sector Model

The Lewis dual-sector model explains development as a transfer of workers from a low-productivity traditional sector to a high-productivity modern sector. Developing economies can retain surplus labour because modern capital and employment expand more slowly than the supply of workers available at near-subsistence wages.

Structure of the dual economy

The economy contains a low-productivity traditional sector, largely subsistence agriculture, and a higher-productivity modern capitalist sector. In the traditional sector, family or customary income-sharing can keep more workers employed than production requires, creating disguised unemployment.

• Removing surplus workers from the traditional sector initially causes little or no reduction in its total output.
• The modern sector offers a wage above subsistence income to attract workers, but the large labour reserve keeps that wage broadly stable.

Transfer through capital accumulation

Modern firms earn profits because worker productivity exceeds wages. If these profits are reinvested, capital accumulation expands modern production and employment, progressively transferring workers from the traditional sector.

• An effectively unlimited labour supply allows industrial employment to expand without an immediate general rise in real wages.
• The transfer continues until surplus labour is absorbed at the Lewis turning point, after which labour scarcity causes wages to rise.

Why surplus labour may persist

Labour surplus persists when the flow of workers seeking modern employment exceeds the modern sector's capacity to absorb them. Thus, economic growth alone need not eliminate surplus labour if it generates insufficient productive employment.

• Rapid labour-force growth can replenish the traditional sector even as workers are transferred.
• Capital-intensive technology can raise output while creating relatively few jobs.
• If profits are consumed, transferred abroad, or not productively reinvested, modern employment expands slowly.
• Weak agricultural productivity can raise food prices and modern-sector wages before surplus labour is fully absorbed, slowing further employment creation.