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