The model features a
large traditional sector with subsistence incomes and a small modern sector paying much higher
wages. The process of economic development involves expansion of the modern (formal) sector
through capital accumulation, gradually absorbing surplus labour from the subsistence (informal)
sector.
Figure 4 depicts the intersectoral allocation of labour in the Lewis model between rural (r) and
modern (m) sectors.7 L represents the total labourforce, MPL is the marginal productivity of
labour, and W the real wage. Due to a ‘surplus’ of labour, MPLr is very low, with the modern