LEWIS THEORY

OF
UNMLIMITED
SUPPLY OF
LABOUR
 LEWIS MODEL
• The model seeks to explain that by judiciously
exploiting their unlimited supply of labour,the
less developed countries can stimulate their
domestic capital formation & thereby the
process of growth.
• “ECONOMIC DEVELOPMENT WITH
UNLIMITED SUPPLY OF LABOUR”
 ASSUMPTIONS
• Because of the high density of population in
less developed countries, many people are
disguisedly unemployed.
• The supply of labour is perfectly elastic at the
subsistence rate of wages.
• Less developed economies are dual
economies.
 Features of lewis model
Mobilisation of labour
less developed countries
should mobilise labour from
the sLubsistence sector
where the marginal
productivity of labour is low
& transfer it to the
capitalistic sector where
marginal productivity of
labour is high.
 Capitalistic 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 labor. It includes manufacturing, plantations,
mines etc. The capitalist sector may be private or public.
•
OS is as before average subsistence earnings, and OW the
capitalist wage.
• WN1Q1 represents .. the surplus in the initial' stage. .”, Since
some of this is
• reinvested, the amount of fixed capital increases.
Hence the schedule of the
marginal productivity of labour is
now raised throughout, to the
level of N2Q2.
Both the surplus and capitalist
employment are now larger.
Further
reinvestment raises the schedule
of the marginal productivity of
labour to
N3Q3. And the process continues so
long as there is surplus supply of
labour.
 Capital formation through bank
credit
• Lewis is of the opinion that in less developed
countries capital formation may be stimulated
through bank credit as well.
• Inflation generated by way of bank credit in the
process of capital formation is self- liquidating.
 End of growth process
• The process of growth comes to an end owing
to several factors:
• Increased demand for workers
• When the pressure of population increases in
subsistence sector.
 criticism
• Limited scope
• Mobility of labour is not easy
• Lack of skilled workers
• Lack of entrepreneurs
• Unequal distribution of wealth
• Neglect of aggregate demand
Thank You