Lewis model

Also called: Lewis dual-sector model, Surplus labour model · Topic: Economic Growth Theories and Business Cycles · NCERT: Beyond NCERT

Meaning

The Lewis model (W. Arthur Lewis, 1954; Nobel 1979) says a developing country has two sectors. Poor traditional agriculture holds surplus labour, meaning workers who can leave without farm output falling. A modern capitalist sector (industry) hires these workers at a constant wage (subsistence plus a small margin). Because wages stay fixed, profits rise. Capitalists reinvest those profits, and this drives growth.

It matters because it explains structural transformation, the shift of workers from farms to factories and services. It also gives UPSC the frame for India's big question: 43% of workers still produce only 18% of GVA in agriculture (NCERT, 2022).

• Key formulas: MPL = ΔOutput ÷ ΔWorkers. Profit per industrial worker = Output per worker − Constant wage.

Explanation

The two sectors

• Dual economy: one country has two very different economies side by side.
• Traditional sector (subsistence agriculture):
• It has too many workers for the work available.
• Many workers have a marginal product of labour (MPL), meaning the extra output from one more worker, of zero or near zero.
• This is disguised unemployment. People look employed, but if some leave, total output does not fall.

• Example: 8 family members work a farm that needs only 5. If 3 leave, output stays at 50 quintals. So MPL = 0 ÷ 3 = 0.

• Modern capitalist sector (industry):

• It has higher productivity.

• It hires workers at a constant wage set at subsistence plus a small margin. The margin is what pulls workers off the farm.

• The IMF uses the same frame. It describes a low-productivity sector with excess labour (agriculture) and a high-productivity sector (manufacturing) [3]. It also notes that industrial wage rises are held down by farm wages while labour keeps moving across [3].

The growth engine: fixed wage → profit → reinvestment

• Unlimited labour supply keeps wages fixed
• The rural pool looks unlimited, so industry can hire more workers without raising the wage.

• Output grows but the wage bill per worker does not, so profits rise.

• Profits become new capacity

• Capitalists reinvest their profits and factories expand.
• Bigger factories need more workers, so more surplus labour moves across.

• The cycle repeats.

• Farm output does not fall, because the workers who left had MPL = 0.

Worked example (illustrative numbers)

• Farm subsistence income: ₹100/day. Factory wage: ₹130/day (subsistence plus a margin).
• One factory worker produces ₹200/day of output.

• Profit per worker = ₹200 − ₹130 = ₹70/day.

• 1,000 workers give ₹70,000/day of profit.

• This profit is reinvested, new capacity is built, and more farm workers are hired, still at ₹130.

The Lewis turning point: when the engine changes gear

• Definition: the stage when surplus rural labour runs out.
• The IMF describes it as the move from abundant labour to labour shortages. Wages rise, profits are squeezed and investment falls [3].
• After this point:
• Industry must bid workers away from agriculture.

• Wages start rising rapidly. They do not fall.

• Japan reached it in the 1960s.

• China was debated around 2010, as wages in coastal areas rose.
• An IMF study (Das and N'Diaye, 2013) projected that China would reach it between 2020 and 2025 [3].
• It estimated China's excess labour at 151 million (2010) → 57 million (2015) → 33 million (2020) [3].
• China's aggregate wage growth stayed around 15% a year in the decade before 2013 [3].
• The study found that demographics (a shrinking working-age population) would drive this more than policy would [3].

Later extensions of the model

• Fei-Ranis (1961): added agricultural productivity.
• Workers who move to the cities still need food, so the remaining farmers must produce a food surplus.
• If farm productivity does not rise: food becomes scarce, so food prices rise. Factory workers then need higher wages, so profits fall and the growth engine slows.

• Lesson: agriculture and industry must grow together.

• Harris-Todaro (1970): migrants respond to the expected urban wage, not the actual one.

• Expected urban wage = p × W_u, where p = urban jobs ÷ urban labour force.
• Migration continues while p × W_u > W_r (the rural wage).
• Example: W_u = ₹600/day, p = 0.6, so the expected wage = ₹360. W_r = ₹300. Since ₹360 > ₹300, people keep migrating even with 40% urban unemployment.
• This explains why urban slums and the informal sector keep growing.

In India

• India's Lewis transfer is unfinished. These figures come from Class 11 NCERT, Comparative Development Experiences, Table 8.3 (2022):
• Agriculture: 43% of workers but only 18% of GVA (Gross Value Added, the value of output minus the inputs used up).
• Relative labour productivity = GVA share ÷ workforce share. For Indian agriculture it is 18 ÷ 43 = 0.42, so a farm worker produces about 42% of the average worker's output.

• For comparison: India industry = 28 ÷ 26 = 1.08; India services = 54 ÷ 31 = 1.74; China agriculture = 8 ÷ 23 = 0.35, but China's farm workforce is much smaller.

• India skipped the Lewis path.

• China followed agriculture → industry → services.
• India and Pakistan moved directly from agriculture to services.
• Services workforce share (1980s → 2022): India 17 → 31; China 12 → 45; Pakistan 27 → 38.

• Class 11 NCERT (LPG: An Appraisal) says post-1991 growth was "mainly driven by growth in the service sector".

• Latest PLFS data (Periodic Labour Force Survey, MoSPI's regular survey of jobs and unemployment):

• Share of workers in agriculture: 45.8% (2022-23) [2] → 44.8% (2024) → 43.0% (2025) [1]. Agriculture is still the largest employer (2025) [1].
• Manufacturing share: 11.6% (2024) → 12.1% (2025) [1].

• Regular wage/salaried workers: 22.4% (2024) → 23.6% (2025) [1]. Self-employed: 58.2% (2023) → 57.5% (2024) → 56.2% (2025) [1].

• How fast the transfer must happen:

• The Economic Survey 2023-24 assumes agriculture's workforce share falls from 45.8% (2023) to one-fourth by 2047 [2].
• On that basis, India needs about 78.5 lakh non-farm jobs every year until 2030 [2].

Don't confuse with

• Harris-Todaro model (1970): Lewis assumes migrants move for an actual, constant urban wage. Harris-Todaro says they move for the expected wage (p × W_u), which is why migration continues even with urban unemployment.
• Fei-Ranis model (1961): Lewis largely ignores the farm sector's growth. Fei-Ranis adds agricultural productivity and a food surplus as conditions for industrial growth to continue.
• Open unemployment: openly unemployed people have no work and are looking for it. In disguised unemployment, people appear to work, but their MPL is zero or near zero.
• Premature deindustrialisation (Dani Rodrik): this is not part of the Lewis model. It is a modern problem where manufacturing's share of jobs and output peaks at lower income levels, so the sector that should absorb surplus labour stays too small.

Prelims Hooks

• Lewis model (1954), Nobel 1979: a traditional sector with surplus labour (MPL near zero) and a modern sector that hires at a constant wage (subsistence plus a small margin).
• Engine of growth: fixed wage → rising profits → reinvestment by capitalists → more labour absorbed. Farm output does not fall because the MPL of the workers who left was zero.
• Lewis turning point: surplus labour runs out and wages rise rapidly. The trap: they do not fall. Japan: 1960s. China: the IMF projected 2020-2025 [3].
• Fei-Ranis (1961) = agricultural productivity and food surplus. Harris-Todaro (1970) = expected urban wage = p × W_u.
• NCERT Table 8.3 (2022): Indian agriculture has 43% of workers but 18% of GVA. China's services workforce share (45%) is higher than India's (31%).
• PLFS 2025: agriculture 43.0% of workers, down from 44.8% in 2024; manufacturing 12.1%, up from 11.6% [1]. Economic Survey 2023-24: about 78.5 lakh non-farm jobs a year until 2030 [2].

Mains Points

• India needs labour-intensive manufacturing to finish its Lewis transfer.
• Services have 54% of GVA but only 31% of workers (2022), because IT and finance need skills most farm workers lack.
• Factory jobs absorb low-skill labour better. So the 78.5 lakh non-farm jobs a year target [2] points to textiles, food processing, electronics assembly and construction.

• China's surplus labour fell from 151 million (2010) to 33 million (2020) [3], and its wages are rising. This gives India a window to attract low-skill manufacturing. But premature deindustrialisation and automation may narrow it. Leapfrogging (UPI, India Stack) raises productivity but creates few mass jobs.

• Fei-Ranis lesson for policy: moving labour out of farms needs higher farm productivity (irrigation, seeds, agri-value chains). Otherwise food inflation pushes up wages and eats into industrial profits. Agriculture and industry policy must run together, not one after the other.

• Harris-Todaro warning for urban policy: creating urban jobs alone can raise urban unemployment, because it attracts more migrants. Rural non-farm jobs, growth in small towns and skilling spread the Lewis transfer more evenly and reduce slum growth and informality.

Related concepts

• Lewis turning point
• Leapfrogging

Read more

• Dual economy and structural transformation: Lewis