A RE-EVALUATION OF THE CONTRIBUTION OF THE RURAL-TO-URBAN LABOR FLOW

In 1954, W. Arthur Lewis published his well-known landmark article conceptualizing a two-sector model of a developing nation, and centered his analysis around the classical assumption of an unlimited supply of labor [12]. The two sectors in the model consisted of the non-capital-using subsistence sector, and the capitalist sector which used reproducible capital. Among the key features of the model was the gain in productivity to be derived from the transfer of labor from the labor-abundant subsistence sector to the more productive capital-using sector. Given an assumption of a negligible marginal productivity of labor in the subsistence sector, labor could be transferred at a very low opportunity cost and with very little required increase in wages. Cheap labor was viewed as a boon to development since it produced a “capitalist surplus” which could be reinvested in capitalist enterprise for continued growth. This capitalist surplus would continue to be reaped so long as there existed surplus labor in the subsistence sector to provide labor to the capitalist sector at a constant wage. The capitalist surplus was viewed as the key to the model since it was assumed that savings and investment were available primarily from profits and not from wages or rents.