Structural Change Model by W.

Arthur Lewis or Dual Sector Model

ASSUMPTIONS:

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
THEORY:
1. One of the best known theoretical model of development that focused on structural
transformation was formulated by w Arthur Levis in the mid-1950s. His two sector model
became a general theory of development in which largely third world Nations progress were
registered or witness during 1960s and early 1970s
2. Like many classical economists Lewis believes that there exists unlimited surplus labour of
subsistence among developing countries he asserted that economic development takes place
when labour move from the subsistence sector (agricultural sector) to Industrial sector for
higher income.
3. According to Lewis, since there is unlimited supply of surplus labour, the marginal product
of surplus labour become zero or negative in certain cases.
4. As a result, developing economies hold on opportunities to build new factories for expand
existing ones by drawing the supply labor from agriculture to industrial production.
5. Therefore, this rural-urban migration of labor from subsistence to capitalist sectors is what
induces growth and development among Nations.
6. The wage rate that the labor earns in the subsistence sector is called subsistence wage rate.
Lewis asserted that the subsistence wage rate affects the industrial wage rate such that the
industrial wage rate is always higher than the subsistence wage rate.
7. Lewis believes that given low marginal productivity of labour in agriculture sector, the wages
in industrial sector a bound to be higher, given the highest standard of living in the urban
sectors and prevalence of trade union who push higher industrial wage rate in industrial
sector. 
8. According to Lewis, an economy witness rampant growth when such rural urban migration
occurs this is due to the following reasons:
a) As surplus labor migrates from agricultural to industrial sector, the average product and
hence the per capita income of the labor left behind in the agriculture sector tends to
increase and as a result the agricultural output increases.
b) As the surplus labor with zero marginal productivity migrate to industrial sector, the
employment and hence industrial output tends to rise.
Since, both agriculture and industrial output grows with rural urban migration, developing
economies register higher level of growth.
CRITICISM:
 1. Existing Unemployment: Lewis model fail to explain that if there exist unemployment
in the urban sector already, why this rural urban migration happened?
2. Ignoring the Balanced Growth: Lewis seems to have ignored the balanced growth
between agriculture and industry. Given the linkages between agricultural growth and
industrial expansion in poor countries, if a section of the profit made by the capitalists is
not devoted to agricultural development, the process of industrialization would be
threatened.
3. Ignoring the Role of Leakages: Possible leakages from the economy seem to have been
ignored by Lewis.  He assumes boldly that a capitalist's marginal propensity to save is
close to one. But capitalists alone are not the only productive agents of society. Small
farmers producing cash crops are also quite capable of saving the required capital. The
world's largest cocoa industry in Ghana is entirely the creation of small enterprise capital
formation.
4. Process of Migration is Neither Smooth or Costless: Lewis assumed that the transfer
of unskilled labor from agri. to industry is regarded as almost smooth and costless. But,
practically it is no so as industry requires different types of labor. If this problem is
removed with the help of investment in education and skill formation, the process of
migration will become costlier and expensive.
5. Variation in Labor Demand: Labor demand varies considerably and such demand is at
its peak during the sowing and harvesting season. Thus during some months of the year
the MPL may be above-zero. In such situation, the positive opportunity costs will involve
in transferring the labor from agri. sector. As a result, the labor transfer will reduce agri.
output.

PRACTICAL APPLICATION OF LEWIS MODEL

1. The Lewis model was applied to the Egyptian economy by Mabro in 1967 and despite the
proximity of Lewis's assumptions to the realities of the Egyptian situation during the
period of study, the model failed firstly because Lewis seriously underestimated the rate
of population growth and secondly because the choice of capital intensiveness in
Egyptian industries did not show much labor using bias and as such, the level of
unemployment did not show any tendency to register significant decline.
2. The validity of the Lewis model was again called into question when it was applied to
Taiwan. It was observed that, despite the impressive rate of growth of the economy of
Taiwan, unemployment did not fall appreciably and this is explained again in reference
to the choice of capital intensity in industries in Taiwan. This raised the important issue
whether surplus labor is a necessary condition for growth.