Origins and basic structure
Like the classical economists, the Saint Lucian economist W. Arthur Lewis (1954) imagined an economy in which labour is available in practically unlimited supply. The traditional rural sector has so much labour that withdrawing some barely reduces output, and the modern sector can obtain all the workers it needs at a wage only slightly above subsistence. Capitalists in the modern sector therefore reinvest profits to expand employment, and because wages do not rise, the profit share and the saving rate increase and capital accumulation accelerates. Lewis saw this as the core of economic development and used it to explain how an economy with a low saving rate becomes one with a high saving rate. This links to the questions of saving and investment emphasized by the Harrod–Domar model.
The Lewis turning point and extensions
Once surplus labour has been absorbed, the modern sector must pay higher wages to attract workers; this moment is called the Lewis turning point. Ranis and Fei (1961, 1964) refined the model by stressing that rising agricultural productivity must support industrialization, while Jorgenson (1961) offered a neoclassical dual economy model without surplus labour. Schultz (1964) criticized the assumption of surplus labour with zero marginal product, arguing that traditional farmers act efficiently given their circumstances. Todaro (1969) and Harris and Todaro (1970) developed migration theory by explaining why rural people move to cities despite urban unemployment, pointing to differences in expected income.
East Asian evidence and assessment
Minami (1968) argued that the Japanese economy passed the Lewis turning point around the early 1960s, and Cai Fang (2010) described how a debate about a turning point arose in China as demographic change was accompanied by rapidly rising wages for migrant workers. Looking back on his own model, Lewis (1979) noted that dualism persists in various forms throughout development. In a sixty-year retrospective, Gollin (2014) concluded that Lewis's insight into productivity gaps between sectors and the reallocation of labour remains central to modern research on structural change. The model also connects to explanations of the Kuznets curve, under which inequality first rises and then falls during growth.
FAQ
- What is the Lewis model in simple terms?
- In a country with too many hands on farms, factories can keep hiring at low wages and reinvesting profits, so the economy grows as labour moves into urban industry.
- What is the Lewis turning point?
- It is the point at which surplus rural labour has been fully absorbed by industry, so employers must raise wages to attract more workers.
Sources reviewed: 2026-10-26
References
- Lewis, W. A. (1954). Economic development with unlimited supplies of labour. Manchester School, 22(2), 139–191.
- Lewis, W. A. (1958). Unlimited labour: Further notes. Manchester School, 26(1), 1–32.
- Lewis, W. A. (1979). The dual economy revisited. Manchester School, 47(3), 211–229.
- Ranis, G., & Fei, J. C. H. (1961). A theory of economic development. American Economic Review, 51(4), 533–565.
- Fei, J. C. H., & Ranis, G. (1964). Development of the Labor Surplus Economy: Theory and Policy. Homewood, IL: Irwin.
- Jorgenson, D. W. (1961). The development of a dual economy. Economic Journal, 71(282), 309–334.
- Schultz, T. W. (1964). Transforming Traditional Agriculture. New Haven: Yale University Press.
- Todaro, M. P. (1969). A model of labor migration and urban unemployment in less developed countries. American Economic Review, 59(1), 138–148.
- Harris, J. R., & Todaro, M. P. (1970). Migration, unemployment and development: A two-sector analysis. American Economic Review, 60(1), 126–142.
- Minami, R. (1968). The turning point in the Japanese economy. Quarterly Journal of Economics, 82(3), 380–402.
- Kuznets, S. (1955). Economic growth and income inequality. American Economic Review, 45(1), 1–28.
- Cai, F. (2010). Demographic transition, demographic dividend, and Lewis turning point in China. China Economic Journal, 3(2), 107–119.
- Gollin, D. (2014). The Lewis model: A 60-year retrospective. Journal of Economic Perspectives, 28(3), 71–88.