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.
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