Questions: The Lewis Model and Structural Transformation

Question 1

A factory owner in a Lewis-type economy expands production, hiring 500 additional workers from rural areas. According to the Lewis model, what happens to the factory wage?

• A. It rises because increased labor demand bids up wages
• B. It stays roughly constant because the surplus labor supply is effectively unlimited at the subsistence wage
• C. It falls because more workers now compete for factory jobs
• D. It rises proportionally with capital accumulation

Answer: (B)

The key mechanism is that as long as agricultural surplus labor exists, the industrial wage stays flat — just above subsistence. There is no wage pressure because the pool of available workers is so large that expanding the industrial sector draws from a supply that is, for practical purposes, unlimited. Wages only begin to rise after the Lewis turning point, when surplus labor is exhausted. Option A describes post-turning-point dynamics, not the labor-surplus phase.

Question 2

China's coastal factory wages began rising sharply in the 2000s after decades of cheap labor. How does the Lewis model interpret this?

• A. Evidence that China's industrial sector became inefficiently large
• B. The Lewis turning point — agricultural surplus labor was exhausted, so hiring more workers now requires pulling genuinely productive farm workers away from agriculture
• C. A policy failure caused by minimum-wage legislation
• D. Evidence that the Lewis model does not apply to large economies

Answer: (B)

Rising wages signal that the labor-surplus phase has ended. Once surplus labor is exhausted, further expansion of industry requires competing for workers who are genuinely productive on the farm — so agricultural wages must rise to retain them, dragging industrial wages up. This is the Lewis turning point in action. The model predicts exactly this transition from cheap-labor development to a labor-scarce economy with rising wages and falling profit margins.

Question 3

In the Lewis model, industrial wages rise gradually as the industrial sector expands and absorbs more workers.

• T. True
• F. False

Answer: False

This reverses the model's key prediction. During the labor-surplus phase, wages stay roughly constant at just above the agricultural subsistence level. They do not rise as industry expands, because surplus agricultural workers are available at the going wage. This is precisely what channels all industrial productivity gains to capitalists as profits (rather than workers), fueling the reinvestment cycle. Wages only rise after the turning point, when surplus labor is gone.

Question 4

In the Lewis model, all the productivity gains from the expanding industrial sector flow to capitalists as profits during the labor-surplus phase.

• T. True
• F. False

Answer: True

Because industrial workers are paid the fixed subsistence-plus wage rather than the full value of their marginal product, the gap between what they produce and what they earn accrues to capitalists as profit. These profits are reinvested, expanding the industrial sector further — which absorbs more surplus labor — which generates more profits. This self-reinforcing cycle is the engine of Lewis-type development, and it depends entirely on wages staying flat while productivity grows.

Question 5

Why does the Lewis model predict rapid capital accumulation specifically during the labor-surplus phase, and what ends it?

Model answer: During the labor-surplus phase, industrial wages are fixed just above subsistence because the supply of agricultural surplus workers is effectively unlimited. Since wages don't rise as the industrial sector expands, all productivity gains flow to capitalists as profits. These profits are reinvested, expanding the industrial sector further, absorbing more workers, generating more profits — a self-reinforcing cycle. This phase ends at the Lewis turning point, when agricultural surplus labor is exhausted. Further expansion now requires pulling genuinely productive workers away from farming, forcing up agricultural wages and then industrial wages too. Rising wages compress profits, slow reinvestment, and transition the economy from labor-surplus to labor-scarce dynamics.

The Lewis model's power is in identifying the structural mechanism: development is not just aggregate growth but a specific sectoral reallocation process driven by the gap between agricultural subsistence wages and industrial productivity. Once that gap closes — when surplus labor is gone — the self-reinforcing engine stops and the economy faces a different set of constraints.