LEWIS THEORY OF UNMLIMITED SUPPLY OF LABOUR - PowerPoint Presentation

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LEWIS THEORY OF UNMLIMITED SUPPLY OF LABOURSlide2

Introduction

The Theory Unlimited Supply of

Labor

(1954) by

Sir William Arthur Lewis

provides a theoretical description of how an agrarian society gets transformed in a developed and industrialized economy. This theory is also known as

dual sector model

or more popularly as

Lewis model

.

In the theory there are two sectors- the

Traditional or

Subsistence Sector

which is situated in the rural areas and is confined to the cultivation of crops for domestic consumption requirements; and the

Capitalist

or

Industrialized Sector

whose economic activities are mainly mines, plantation and manufacturing which are carried out purely for profit motive. Slide3

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.

He assumed that wages in the expanding capitalist sector are determined by the wage earnings in the subsistence sector i.e.

WK = f (

Ws

)

And WK are 30% >

Ws

Where WK stands for wages earned in the capitalist sector and WS stands for wages earned in the traditional sector.

Lewis assumed that profits are the only source of capital accumulation

,

the propensity to

consume

of workers is one and that of capitalists is zero whereas their propensity to save is one. Slide4

Process of growth

Lewis starts his model by identifying the central problem in the theory of Economic Development. He said capital accumulation is the central problem confronting every underdeveloped economy i.e. how to transform an economy which is saving and investing only 3 to 4 % of its National Income into an economy which saves and invests 12 to 15 % of its National Income.

This

is because increase in savings if channelized into productive investment can bring about multiplier times increase in National Income which in turn would lead to Economic Development. Slide5

The supply of labor is so much in excess of its requirements that its marginal productivity rules nearly at zero. Accordingly, workers get just subsistence wages in the primary sector. Wages are comparatively higher in the capitalist sector.

If some workers are withdrawn from the primary sector and are prepared to work in the capitalist sector at their prevailing wage rate, the marginal productivity of these workers should be higher than their paid out wages, so that profits are expected to rise in the capitalist sector, these profits are termed as “capitalist surplus”.

Capitalist are expected to reinvest this surplus which would stimulate the process of capital formation as well as national growth.

The process of growth would cease at a point when the workers from the primary sector are prepared to work only at the capitalist wage rate equal to their productivity so that generation of surplus is

neutralised

in the capitalist sector. Then

capital

accumulation in the open economy is possible through two ways only:

1

) By immigration of abundant

labor

2

) Outsourcing of capital Slide6

Features of

lewis

model

Mobilisation

of

labour

less developed countries should

mobilise

labour from the subsistence sector where the marginal productivity of labour is low & transfer it to the capitalistic sector where marginal productivity of labour is high.

However, all the workers are basically unskilled. It is , therefore, suggested to convert them into skilled workers by providing them with training.Slide7

Capitalist sectorSlide8

The initial employment in the capitalist sector at

Wk wage rate is

ONo

established by the intersection of supply of

labor

curve

and demand for

labor curve , corresponding to which the total wage bill is OWke0n0 and total output produced in the capitalist sector is OMe0n0. Thus in the present scenario the capitalist earns a profit or surplus equivalent to MWke0. Now when the capitalist is earning profits, he’ll reinvest the income in the business with a desire to earn more profit. This will lead to an increase in the employment from ON0 to ON1 with the shift in demand for

labor

curve towards right

.

This increase in employment accrues to migration of

labor

from traditional to capitalist sector for the purpose of larger income.

Furthermore with rise in employment in capitalist sector, its output and profit will also rise.

So

again the capitalist will be tempted and reinvests the profits in the business leading to a rightward shift in the demand for

labor

curve, increase in employment and increase in surplus.

Therefore

the focal point in Lewis model is that in order to increase the output, the capitalist profit should grow i.e.

profit is a very important source of capital accumulation.

Hence the factors determining the process of Economic Development in the Lewis model are (a) accrual and recycling of profits by the capitalist (b) share of capitalist sector in National Income and share of capitalist profits in the National IncomeSlide9

Capital formation through bank credit

Although accrual of profits by the capitalist is an important source of capital accumulation, it is not the only source

.

According to Lewis, the provision of BANK CREDIT plays the same role as profits. But the expansion of bank credit generates inflationary pressures in the economy which as per Lewis are a temporary phenomenon which lasts only till the project fructifies

.

When inflation disappears real income of the people would increase and the government can collect larger taxes which can increase government’s revenue and that would increase savings which would further reduce inflation. Slide10

End of

Growth

P

rocess

.

The process of capital accumulation as demonstrated by Lewis may seem to be an endless process due to capitalist’s greed to earn more and more, but Lewis gave few cases under which it’ll come to an end. These cases are as under:

It

is the non-availability of the surplus

which acts as a drag on the process of Economic Development.

When

the capitalist sector is growing faster than the traditional sector, then the Terms of Trade (TOT) may turn against the capitalist sector. As the demand for goods of traditional sector rises, cost of production will also rise and TOT will turn against the capitalist sector. Thus it’ll be very difficult to expand the capitalist sector.

If

the traditional sector adopts new methods of production, its output would rise and hence wages in the traditional sector would rise. This would lead to a rise in the wages of the capitalist sector which would further lead to a fall in the profits of the latter sector.

If

the workers in the capitalist sector start imitating the capitalist’s way of life, they’ll find it difficult to sustain at their present wages. They would then seek for higher wages which would increase the total wage bill resulting in a fall in the capitalist’s profits; halting the process of development. Slide11

criticism

It is argued that Lewis built this model around the primary assumption that there is prevalence of unlimited supply of

labor

which in itself is questionable. For example West African countries are thinly populated yet underdeveloped

This theory wrongly assumes that productivity of

labor

in negative in the traditional sector. Some economists like Peter. G Schultz ruled out the possibility of disguised underemployment and unemployment in the traditional sector.

Lewis model’s assumption that economic factor of higher wages would induce everyone from the traditional sector to move to the modern sector is widely criticized

as there exists other social and personal ties in the traditional sector which are very strong and difficult to break. Hence mobility of

labor

is

not a

universal phenomenon. Slide12

Thank You