Question

Describe the major components of the Lewis Model

How could you utilize this model in your sourcing activities and engagement with other professionals

Answer 1

Lewis Model: The dual-sector model is a model in developmental economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour movement or transition between two sectors, the capitalist sector and subsistence sector.

Lewis defined capitalist sector as that part of the economy which uses reproducible capital and pays capitalists thereof. The use of capital is controlled by capitalists who hire the services of labour in manufacturing, mining and plantations etc.

Lewis defined subsistence sector as that part of the economy which is not using reproducible capital. It is also known as self employed sector. An example would be of agriculture sector.

Lewis Model focuses on dual economics based on the assumption that there is surplus labour available in subsistence sector (eg. agriculture) that an elastic labour supply movement ocurrs to the capitalist sector (eg. manufactiring) on account of higher wages to labour. Since the subsistence sector is highly inefficient thereby it generates less income for labours and the capitalist sector is highly efficient therefore resulting in higher wages for labour.

An Organization's sourcing activity can utilize Lewis Model and therby benefit immensely on account of cheap availability of labour. Large multi national organisations operating in several countries can derive the benefits of Lewis model by sourcing cheap labour from developing countries where surplus labour is readily available and engage them in day to day semi- skilled or un-skilled jobs after training labour and thereby improve productivity and earn higher profits on account of cheap labour availability in developing countries.

A classic example is that of several US companies setting up manufacturing facilities in China where surplus unskilled labour is available at a substantially lower cost as compared to the US. Similarly, several service organizations in the US have outsourced routine tasks to countries like India and Phillipines where cheap semi-skilled labour is easily available. This results is higher profits for organisations located in the US. Services currently being outsourced are: accounting, IT and customer care.