The dual-sector model given by Sir William Arthur Lewis winner of the Nobel Memorial Prize in Economics in 1979 is commonly known as the Lewis model, it is a model in developmental economics that explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.
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.
Relationship between the two sectors
The primary relationship between the two sectors is that when the capitalist sector expands, it extracts or draws labor from the subsistence sector. This causes the output per head of laborers who move from the subsistence sector to the capitalist sector to increase. Since Lewis in his model considers overpopulated labor surplus economies he assumes that the supply of unskilled labor to the capitalist sector is unlimited. This gives rise to the possibility of creating new industries and expanding existing ones at the existing wage rate. A large portion of the unlimited supply of labor consists of those who are in disguised unemployment in agriculture and in other over-manned occupations such as domestic services casual jobs, petty retail trading. Lewis also accounts for two other factors that cause an increase in the supply of unskilled labor, they are women in the household and population growth.
The agricultural sector has a limited amount of land to...