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The Lewis model describes the classic development transition: a traditional agricultural sector with surplus labor (low productivity, subsistence wage) supplies workers to a modern industrial sector at a fixed wage above subsistence. Capital accumulates in industry as long as agricultural surplus exists. Development ends when agricultural surplus is exhausted and wages rise.
From your knowledge of production functions, you know that output depends on how labor and capital are combined, and that diminishing returns set in as you add more of one input while holding the other fixed. From growth theory, you understand that sustained increases in output per worker require either capital accumulation or technological progress. The Lewis model applies these ideas to explain the defining structural shift of economic development: the movement of workers from agriculture to industry.
Picture a poor agrarian economy where 80% of the population farms small plots. Because there are so many workers relative to the available land, the marginal product of agricultural labor is extremely low — possibly near zero. Removing a worker from the farm barely reduces total farm output because the remaining workers can cover the gap. This pool of workers with near-zero marginal product is what Lewis called surplus labor. They are employed in the sense that they work, but their contribution to output is negligible. The subsistence wage they earn reflects social convention and family sharing rather than their marginal productivity.
Now suppose a modern industrial sector emerges — a factory, a mine, a commercial enterprise. It needs workers and can afford to pay a wage slightly above the agricultural subsistence level. Because agricultural workers have near-zero marginal product, they can move to industry without reducing farm output. The industrial sector absorbs them at a constant wage (it never needs to raise wages because the supply of surplus labor is effectively unlimited), and all the productivity gains in industry flow to capitalists as profits. These profits are reinvested, expanding the industrial sector, which absorbs more surplus labor, which generates more profits, which funds further expansion. This self-reinforcing cycle is the engine of Lewis-type development.
The model predicts a critical turning point: the Lewis turning point, when surplus labor is exhausted. Once the agricultural sector has released all its excess workers, further migration requires pulling away workers who are genuinely productive on the farm. Agricultural wages must rise to retain them, which forces industrial wages up too. Profits fall, the pace of capital accumulation slows, and the economy transitions from labor-surplus to labor-scarce dynamics. China's experience in the 2000s — when coastal factory wages began rising rapidly after decades of cheap labor — is widely interpreted as a Lewis turning point in action. The model's power is in framing development as a structural process of sectoral reallocation, not just aggregate growth. Its limitation is that it assumes industry will absorb workers productively, which is not guaranteed — many developing countries have experienced urbanization without industrialization, creating large informal sectors rather than a productive modern economy.