The Lewis Model of LaborSurplus Dualistic Development
Development Economics Lecture
Key focus: How shifting labor from lowproductivity agriculture to high-productivity
industry drives economic growth.
Background and Context
• Developed by Sir W. Arthur Lewis (1954)
• Explains structural transformation in developing
economies.
• Structural transformation: long-term shift in an
economy’s structure (from low productivity
sector to high productivity sector).
• Core idea: Labor moves from traditional
agricultural sector (low productivity) to modern
industrial sector (high productivity).
The Dual Economy Structure
• 1. Traditional (Agricultural) Sector:
• Subsistence farming
• Labor-intensive, low productivity
• Surplus labor with near-zero marginal productivity
• 2. Modern (Industrial) Sector:
• Wage employment (paid employment)
• Capital-intensive, higher productivity
• Expanding through profit reinvestment
Key Assumptions of the Lewis Model
1. Surplus labor exists in the traditional sector.
2. Industrial wages are fixed slightly above rural
wages.
3. Profits are fully reinvested in industrial capital.
4. Agriculture’s productivity remains constant
initially.
5. The economy is closed (no international trade
or migration).
The Process of Development
• 1. Industry offers higher wages → workers
migrate from agriculture.
• 2. Industrial production expands as labor shifts.
• 3. Industrial profits are reinvested → capital
accumulation.
• 4. Continuous labor transfer until surplus labor is
exhausted.
• 5. Leads to the Lewis Turning Point → wages
begin to rise.
The Lewis Turning Point
• Occurs when all surplus rural labor is
absorbed.
• Further industrial expansion pushes wages up.
• Marks transition from labor-surplus to laborscarce economy.
• Example: East Asia in late 20th century (China,
South Korea).
Diagram Explanation
Policy Implications
• Promote industrial investment to absorb rural
labor.
• Support agricultural productivity to prevent
food shortages.
• Encourage reinvestment of profits into
productive sectors.
• Avoid excessive urban bias and taxation of
agriculture.
Discussion Questions (Homework)
• 1. Why did Lewis believe industry is key to
economic development?
• 2. What happens when profits are not
reinvested?
• 3. Where is Indonesia in the Lewis model of
development?
• Review the paper:
Moeis, F. R., Dartanto, T., Moeis, J. P., & Ikhsan, M. (2020). A
longitudinal study of agriculture households in Indonesia: The
effect of land and labor mobility on welfare and poverty
dynamics. World Development Perspectives, 20, 100261.
Key Takeaways
• • Development involves shifting labor from
low- to high-productivity sectors.
• • The Lewis Model provides a foundation for
understanding structural change.
• • However, real-world dynamics—institutions,
technology, and trade—modify outcomes.
• Next topic: Agricultural Transformation and
Rural-Urban Linkages.