Outline and Evaluate the Value of the Lewis Model to Understand Growth in a Labor Surplus Economy

Introduction

Lewis Model is one of the most famous theories of the modern economic development. W. Arthur Lewis formulated the theory and published it for the first time in his article ‘Economic Development with Unlimited Supplies of Labor’ in the year 1954. The article provides an in-depth understanding on the concept of surplus labor within an economy, which is considered a significant issue for the implementation of the model. The entire theory is based on two different economic structures, where one is the modern capitalist structure referring to the urban manufacturing segments, while the other is the subsistence structure that refers to the traditional rural agricultural segment (Lewis 1954, 146-147). 

The theory states that labor is available in abundance in the subsistence structure of the economy and hence it is generally seen that the marginal productivity of these labors are zero, which leads to low average income within the group. With contrast to the agricultural sectors, the labors of the manufacturing departments are found to earn more due to the relatively higher value of products that they produce. This high income structure attracts the labors of the agricultural sector to move towards the modern manufacturing sector. The manufacturing sector provides fixed wages to the labors and extracts good productivity from them, which results in increasing profits of the manufacturing sector. Hence, the Lewisian theory contributes in describing the transitional development of a traditional economy pertaining to a modern industrial economy (Lewis 1954, 141).

Hence, it can be inferred that the implication of the Lewis model in the modern economics is noteworthy and therefore helps to determine and understand the significant facts related to a developing economy along with its existing labor force. A critical analysis of the Lewis model will hence help to evaluate its significance in understanding the growth of a labor surplus economy.

Economic Growth and Labor Supply Explained with Lewis Model

In the Lewis model, it has been mentioned that labor supply in the developing countries is unlimited and elastic. Agriculture is the main economic activity performed by the labor force in these countries and hence a large number of labors are associated with it. The model explains that this unlimited supply of labor is generally found in these developing countries due to several reasons, one of which is the high birth rate that is constantly increasing the population. Besides, the existence of improved public healthcare system, reducing the death rates in case of epidemics and involvement of women in household works, who are actually termed as unemployed also, contributes to the widened supply of labor in these economies. Moreover, the workers are witnessed to be engaged in such activities, in which they do not contribute at all. The marginal productivity of such labor is either found to be zero or even negative at certain points of time (Lewis 1954, 141). The labor supply therefore keeps on increasing in the subsistence sector, without having any impact on the overall productivity. The trend of unlimited supply of labor is hence commonly observed in the East Asian countries such as Philippines, Malaysia, China, India and Pakistan among others (FNST 2017).

Lewis also stated in his theory that, there is a demand of labor in the capitalist sector, which is ready to pay about 30% more wages to the labors as compared to that of the agricultural sector since the productivity of the capitalist sector earns a hefty amount of income (Lewis 1954). This attraction of extra income further draws numerous labors from the agricultural sector to the modern manufacturing sector, where they are employed for higher production and income. This transition can hence be easily observed in Japan, South Korea, Taiwan and Hong Kong, where majority of the country’s population is found to have shifted from agriculture to the manufacturing sectors (FNST 2017). The increased income of the manufacturing sector gets reinvested to have more industrialization, which in turn leads to the accumulation of capital. With this increasing capital accumulation, the economy starts to grow sustainably, thereby leading to a rise in national income.

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Sector C and D of Lewis Model

The Lewis model encompasses the activities taking place in the two sectors of an economy, which are the capitalist sector and the subsistence sector depicted as C and D respectively (Lewis 1954, 146-147). It has been stated in the theory that there is an existence of both the sectors in every economy with higher concentration of labor towards the subsistence sector of the economy in case of the developing countries, which results in unlimited supplies of labor for the capitalist sector. The countries of South East Asia primarily India, Bangladesh, Philippines and Pakistan have huge areas for agriculture and it can also be inferred that the concentration of labor in these countries are high in agricultural sector in-spite of possessing a well-performing manufacturing sector (Briones and Felipe 2013, 1-2). The two sectors can hence be appropriately explained by providing an in-depth understanding of the Lewis model.

Sector C

Lewis mentioned the capitalist sector as sector C in his model, which generally includes manufacturing and mining activities of the multinational corporations and other large organizations, which are either privately or publicly held. This sector requires a huge number of labor as its intention is to be competitive and profitable in the market. The capitalist sector is also technologically advanced, which utilizes the machines required for mass production. The average productivity may be constant or even increasing but the total production increases with the increase in each unit of labor. The increasing productivity results in higher profits, which gets reinvested and by this way the growth process always persists in the capitalist sector (Lewis 1954, 158). Although the concentration of this sector is mostly seen in the North American and European nations, some countries of Asia especially Japan, Taiwan and Hong Kong are also found to be extremely advanced in their capitalist sectors (Patnaik 1999). The labors engaged in this sector, generally obtains fixed wages, which is higher in comparison to that of the subsistence sector.

Sector D

The subsistence sector, which has been denoted as sector D in the model basically, comprises the traditional agricultural sector along with some small and medium enterprises operated by the farmers and rural people, following the labor intensive techniques for production. This sector is technologically backward and hence, hardly any growth can be seen therein. The increased population tends to accumulate in the agricultural sector, which therefore boosts up the chances of labor surplus. As more labor is engaged into agriculture, the average productivity of such labors decreases with negative or zero marginal productivity, which is comparatively less industrious and results in offering subsistent level of wages to the labors. In majority of the countries of Southeast Asia, agriculture is the main stay that determines the functioning of an economy (Briones and Felipe 2013, 1-2). This in turn attracts the growing population of these countries to engage into it.

Contribution of Sector Surplus through Labor Migration

Sector surplus basically refers to the over availability of one of the factors of production in a sector of an economy. According to the Lewis model, labor is the surplus factor, which can be observed in the subsistence sector of a developing economy. This over availability of labor does not provide any benefits to the concerned sector as the total production does not increase with increasing labors. This in the manner, in which the sector fills up with disguised unemployment resulting in the reduction of average income of the labors (Lewis 1954, 141).

The other sectors such as the modern capitalist sector include manufacturing, production, mining and plantation, which increase the requirement of labor largely due to their level of competition, urge to earn higher profits and growth prospects. These sectors possess huge potential for mass production and needs to earn higher revenues as the availability of all other factors of production such as land, capital and entrepreneurs are available to them. So they are willing to hire more labors for a higher wage than that available in the subsistence sector. This excess wage therefore tends to attract the unlimited labor available in the subsistence sector to move towards the modern capitalist sector and to get engaged in something productive (Lewis 1954, 150). The inclusion of these labors in the capitalist sector hence results in higher productivity and profitability, which in turn results in increasing the national income to a large extent. The productivity of the subsistence sector of the economy does not get hampered at all due to such labor migration. In fact, the labor force of subsistence sector is benefited as their income increases with the increasing average productivity (Lewis 1954, 172).

This process related to the shifting of labors continues until the supply of labor in the subsistence economy gets exhausted. At this point of time, the wages of the labors engaged in the capitalist sector starts increasing gradually. After reaching this point, the increasing capital formation will induce the capitalist sector to either bring more labors from other countries having unlimited supply of labor or in exporting capital to the other countries (Lewis 1954, 176). The countries of Middle East, Europe and North America import a subsequent amount of labor from the labor surplus countries of Asia (FNST 2017). The high wages provided by the developed countries further attracts numerous labors to shift in those countries and work in their firms. They even invest their surplus capital in the developing countries, when there is no possibility of importing labor. Both these techniques, help in reducing capital formation at home and further keeps a check over the rising wage rate (Lewis 1954, 176).

Economic Advantage and Values Created by Labor Migration

With the increasing population in the developing countries, migration of labor is a common phenomenon for fulfilling the labor gaps. This transfer of labor not only benefits the importing and the exporting sectors but also turns out to be beneficial for the economic development of the concerned countries (Lewis 1954, 189).

The main function of labor migration is the abolition of labor gap that is mostly witnessed in the capitalist sectors (Hardy 2009). The capitalist sectors of different countries including some countries of Asia require huge supply of labor for their productivity. The demand of labor in this sector is a continuous process and it tends to grow with increasing level of reinvestment capital with the passage of time. The free supply of labor through migration sustains productivity, which in turn helps in the growth of an economy. Some Asian countries especially Japan and Singapore needs to import labor from other countries as they lack adequate factors required for production thereby falling short on domestic labor (FNST 2017).

The unemployed labors of labor surplus countries tend to immigrate to other countries where labor are not available easily. This immigration process helps the host country to obtain talented and skilled labors to mix with their local workforce and thereby increase the efficiency of the people therein, which in turn contributes to the reduction of the gaps in skills (Lowell and Findlay 2001, 7). Asian countries such as India, Brunei, Philippines and China among others provide a significant number of such skilled labors that are productively employed in the capitalist sectors of North America, Europe and Middle East (FNST 2017).

Moreover, there is a good amount of remittances that the home countries of the labors get from the wages of the labors that have migrated. This inflow of remittances helps the home country to develop largely in the sectors of public health, education and local businesses. It hence provides investment options for the receiving country and further helps in the reduction of poverty to a great extent (Adams and Page 2005, 1646). The top two remittance receiving countries of the world include India and China, which further points out the enormous labor supply being made to the Asian countries (World Bank Group 2016, xii).

Apart from all these basic advantages of labor migration, it also has some other advantages towards the labors as well as their home and the immigrated countries such as, assistance to maintain the production level by allocating young as well as enthusiast labors supporting the aging population of the countries. Japan is one of the perfect examples, which possesses a wider range of aging population still found to be serving to enhance the country’s economy (Jack 2016). The country always requires young labors to replace them, which they either appoint locally or from other labor surplus countries. This not only helps in increasing productivity but also helps the country to obtain taxes from the young labors to support the huge pension burden (Embrace 2017). 

Besides, the inclusion of new labors from different backgrounds into the local workforce diversifies the ability of the entire workforce with increased innovation coming from the migrated labors. This further provides a competitive edge to the products of such country from the others. This is also followed by the reduction in unemployment problem amid the over-populous countries at least to some extent, when the labor immigrates to other countries. This also results in bringing down the burdens of excess population of these countries. Finally, the labors returning back to their home countries to settle back brings about a large amount of skills, experience and international contacts which in turn act as a tool for influencing the nation’s productivity (Embrace 2017).

Although innumerable economical benefits of labor migration still exist therein, it is immensely important to identify that the demerits of such process lead to effective sustainability of the productivity growth. The increased free movement of labor may demand for increased security to control the organized crimes such as human trafficking. Uncontrolled incoming of labor might even lead to unemployment and reduction of wages of the employed labors. There may also be increased pressure on the public services, due to the increase of immigrated labor. Apart from these issues, the sending country may also face shortage of young and skilled labors, which may immensely hamper their productivity in the long run (Embrace 2017).

Conclusion

The understanding and analysis of Lewis model provides vital information about labor surplus economies and migration of labors. It further provides an idea of the two distinct sectors of economy along with their structure and features. The model further helps us to identify the reasons for such surplus of labor in the subsistence sector of a developing economy and also their benefits to the other sectors in home country or abroad. The process, through which this transfer of labor takes place, is also an important matter to understand, which ultimately results in the transition of a labor intensive economy to a capitalist one. The implication of Lewis model through labor migration is enough to possess an idea of competitive and growing economies along with improved quality of the lives of the labors. Even the negative aspects of labor migration have been identified in order to make the process more efficient in the future. Comprehending the study, it can be inferred that even if there are limitations and demerits of Lewis model and labor migration, it has poses an enormous value in analyzing and developing a labor surplus economy.