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Lewis Model

  • Published
    30th Oct, 2023

India's labor dynamics are deviating from Lewis' model. Rethinking economic strategies for job creation in and around agriculture is essential.

What is the Lewis Model of Structural Economic Growth and Development?

  • Arthur Lewis put forward a development model of a dualistic economy, consisting of ‘Rural agricultural and urban manufacturing sectors’.
  • Initially, the majority of labour is employed upon the land, which is a fixed resource. Labour is a variable resource and, as more labour is put to work on the land, diminishing marginal returns eventually set in:
  • There may be insufficient tasks for the marginal worker to undertake, resulting in reduced marginal product (output produced by an additional worker) and underemployment.
  • Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts.
  • The resultant higher urban wages (Lewis stated that a 30% premium was required) might therefore tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity.
  • High urban profits would encourage firms to expand and hence result in further rural-urban migration.
  • The Lewis model is a ‘model of Structural Change’ since it outlines the development from a traditional economy to an industrialized one.

Lewis' Model and India's Reality:

  • William Arthur Lewis' model envisioned surplus farm labor shifting to manufacturing for economic growth.
  • India's experience deviates to agriculture's share fell but manufacturing's rise was marginal from 1993-94 to 2011-12.
  • Recent trends show a return to higher farm employment due to pandemic impacts, while manufacturing's share drops.

Structural Transformation Challenges:

  • Shift from "subsistence" to "capitalist" sectors falters; labor movement mainly within subsistence sectors.
  • New jobs created outside agriculture are often low-paid, in services, and construction, not high-productivity industries.
  • Gujarat stands out, resembling Lewis' model, but still has a significant agricultural workforce.

Emerging Labor Challenges:

  • Traditional manufacturing sees automation, making labor transitions more complex.
  • NITI Aayog proposes a new economic model focusing on job creation related to agriculture.
  • This model involves activities beyond farming, like processing, retailing, and supplying services to farmers.
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