LEWIS MODEL OF UNLIMITED SUPPLY OF LABOUR IN MALAYALAM

Summary

This lecture covers the Lewis Model, also known as the dual-sector model, in development economics. The model explains how labor transitions from an agricultural, subsistence-based sector to a growing, profit-driven manufacturing sector in developing economies. It emphasizes the surplus of unproductive labor in agriculture and the reinvestment of profits from the capitalist sector to fuel growth. The model also discusses the bottleneck of skilled labor and the importance of training programs. Ultimately, it highlights the process of moving from subsistence to industrialization for economic development.

Takeaways

• 📘 The Lewis model is a key theory in developmental economics, often referred to as the dual sector model.
• 🏭 It explains economic growth in developing countries by highlighting labor transition between two sectors: the capitalist sector and the subsistence sector.
• 🌾 The model assumes that there is an excess of unproductive labor in the agricultural (subsistence) sector, which can move to the manufacturing (capitalist) sector.
• 💼 Wages in the manufacturing sector are considered fixed, allowing entrepreneurs to make profits, which are reinvested to expand the capitalist sector.
• 🏗️ Industrial growth, driven by reinvestment of profits, helps transition the economy from traditional to industrialized.
• 💰 A key problem is the shift from low savings and investment rates (around 4-5%) to higher rates (12-15%) needed for significant economic growth.
• 📊 The main source of labor comes from people in subsistence sectors like farming, petty trading, or household work, who are drawn to higher wages in the capitalist sector.
• 🔧 Skilled labor is necessary for capitalist sector expansion, and training programs can help address temporary shortages of skilled workers.
• 📈 The capitalist surplus, or the difference between the marginal productivity of labor and the fixed wage, is essential for continued economic growth.
• 🚜 As the surplus labor moves to the capitalist sector, productivity and wages increase, helping to lift the economy out of underdevelopment.

Q & A

What is the Lewis model of unlimited supply of labor?

The Lewis model, also known as the dual-sector model, is a concept in developmental economics that explains the growth of a developing economy through labor transition between two sectors: the capitalist sector and the subsistence sector.

What are the main assumptions of the Lewis model?

The model assumes that a developing country has an excess supply of unproductive labor in the agricultural sector, that wages are higher and relatively fixed in the manufacturing sector, and that profits generated by the manufacturing sector are reinvested in the business as fixed capital.

What are the two sectors mentioned in the Lewis model?

The two sectors are the capitalist sector, which includes industries and manufacturing, and the subsistence sector, which involves agriculture and other traditional economic activities.

Why do workers move from the subsistence sector to the capitalist sector?

Workers move from the subsistence sector to the capitalist sector because wages are higher in the capitalist sector, and the marginal productivity of labor is also higher.

What is the significance of reinvesting profits in the capitalist sector?

Reinvesting profits in the capitalist sector is essential for economic growth, as it leads to increased capital formation, which in turn expands production and generates higher demand for labor.

How does the Lewis model define the concept of surplus labor?

Surplus labor refers to the excess labor available in the subsistence sector that can be transferred to the capitalist sector without affecting agricultural output. This labor is typically unproductive or underemployed.

What role does skilled labor play in the capitalist sector, according to the Lewis model?

The capitalist sector requires skilled labor for expansion, and the shortage of skilled labor is considered a temporary bottleneck that can be addressed through training and development programs.

What is the 'capitalist surplus' in the context of the Lewis model?

The capitalist surplus is the difference between the marginal productivity of labor and the fixed wages paid to workers in the capitalist sector. This surplus represents the profit that can be reinvested to further grow the sector.

What does the model imply about the elasticity of labor supply in the capitalist sector?

The model implies that the supply of labor in the capitalist sector is perfectly elastic at the existing wage rate, meaning that workers are readily available at the fixed wage as long as there is surplus labor in the subsistence sector.

How does the Lewis model describe the process of economic development?

The model describes economic development as a circular process involving surplus generation, increased investment, and increased demand for labor, which gradually moves the economy from underdevelopment to industrialization.