SURPLUS LABOR MODEL OF ECONOMIC DEVELOPMENT

The Lewis-Ranis-Fei (LRF) Model of Surplus Labor is an economic development model . Economic models such as Big Push, Unbalanced Growth, Take-off, and so forth, are only partial theories of economic growth that address specific issues. LRF takes the peculiar economic situation in developing countries into account: unemployment and underemployment of resources and the dualistic economic structure (modern vs. traditional sectors). This model is a classical model because it uses the classical assumption of subsistence wage.

Here it is to understand that the development process is triggered by the transfer of surplus labor in the traditional sector to the modern sector in which some significant economic activities have already begun. The modern sector entrepreneurs can continue to pay the transferred workers a subsistence wage because of the unlimited supply of labor from the traditional sector. The profits and hence investment in the modern sector will continue to rise and fuel further economic growth in the modern sector. This process will continue until the surplus labor in the traditional sector is used up, a situation in which the workers in the traditional sector would also be paid in accordance with their marginal product rather than subsistence wage.

The existence of surplus labor gives rise to continuous capital accumulation in the modern sector because

(a) investment would not be eroded by rising wages as workers are continued to be paid subsistence wage, and

(b) the average agricultural surplus (AAS) in the traditional sector will be channeled to the modern sector for even more supply of capital (e.g., new taxes imposed by the government or savings placed in banks by people in the traditional sector).

In the LRF model, saving and investment are driving forces of economic development. This is in line with the Harrod-Domar model but in the context of less-developed countries. The importance of technological change would be reduced to enhancing productivity in the modern sector for even greater profitability and promoting productivity in the traditional sector so that more labor would be available for transfer.