LEWIS’ TWO-SECTOR SURPLUS LABOR (STRUCTURAL CHANGE MODEL)

This model assumes that: 

1. The model assumes that a developing economy has a surplus of unproductive labor in the agricultural
sector.
2. These workers are attracted to the growing manufacturing sector where higher wages are offered.
3. It also assumes that the wages in the manufacturing sector are more or less fixed.
4. Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage
rate.
5. The model assumes that these profits will be reinvested in the business in the form of fixed capital.
6. An advanced manufacturing sector means an economy has moved from a traditional to an industrialized
one.

The Dual Sector Model is a theory of development in which surplus labor from the traditional agricultural sector is
transferred to the modern industrial sector whose growth over time absorbs the surplus labour, promotes
industrialization and stimulates sustained development.

The subsistence agricultural sector 

 low wages, an abundance of labour, and low productivity through a labour-intensive production process

The capitalist manufacturing sector 

 higher wage rates as compared to the subsistence sector, higher marginal productivity, and a demand for
more workers
 assumed to use a production process that is capital intensive 
o investment and capital formation in the manufacturing sector are possible over time as capitalists'
profits are reinvested in the capital stock
 Improvement in the marginal productivity of labour in the agricultural sector is assumed to be a low priority
as the hypothetical developing nation's investment is going towards the physical capital stock in the
manufacturing sector.
 
The primary relationship between the two sectors is that when the capitalist sector expands, it extracts or draws
labour from the subsistence sector. 
 
If a quantity of workers moves from the subsistence to the capitalist sector equal to the quantity of surplus labour in
the subsistence sector, regardless of who actually transfers, general welfare and productivity will improve. Total
agricultural product will remain unchanged while total industrial product increases due to the addition of labour.