Initially, as the
modern sector invests, raising MPLm, its employment expands, e.g., from L1 to L2, absorbing
labour from the traditional sector without raising Wr . Eventually, the absorption of labour in the
modern sector reaches L3, the Lewis turning point, and incomes begin to rise above subsistence
levels in the traditional sector.
The modern sector’s output may be modeled using the a Cobb-Douglas function (subscript m
suppressed)