Page - (000062) - in Disrupted Development and the Future of Inequality in the Age of Automation

5 AUTOMATION AND STRUCTURAL TRANSFORMATION … 55 The dual economy model of Lewis (1954) is based, as noted, on a traditional or subsistence sector and a modern sector, where in the for- mer, there is a surplus of unproductive labor that is sustained by receiving an equal share of the total product for reasons of traditional/family-based values. Lewis argued that the driver of economic development was a sectoral movement of labor from the “traditional” or “subsistence” or “non-capitalist” sector (of low productivity, low wage, priced to average product not marginal product, and thus widespread disguised unemploy- ment) to the “modern” or “capitalist” sector (of higher productivity, and where wages are set by productivity in the “subsistence sector.” A critical factor is the existence of surplus labor in the traditional sec- tor. Because of this, wages are set just above subsistence across the whole economy, leading to the transfer of labor over time from the traditional to the modern sector, and the capture of labor productivity gains to cap- italists as profits, as these are the source of growth via reinvestment. The floor for wages is institutionally set at subsistence. When surplus labor disappears, an integrated labor market and economy emerge, and wages will then start to rise. The Lewis model was intended as a critique of the neoclassical approach in that labor is available to the modern or capitalist sector of an economy not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labor and subsist- ence labor (the latter of which was a negligible source of net profits for reinvestment, which Lewis saw as the driver for growth). Diao, McMillan, Rodrik, and Kennedy (2017, pp. 3–4) seek to link the structural dualism of Lewis with the neoclassical model, by arguing that the neoclassical model shows the growth process within the mod- ern sector and the dual model shows the relationship between sectors. In short, the emergence of a modern sector with higher and competitively paid wages, and where profits are reinvested by capital owners, creates a pull force. This pull force attracts labor from the traditional sector. After a period of labor exchange via migration, an inter-sectoral equilibrium is reached, and wages are equalized between sectors. Following Lewis’ dual economy, we could divide up an economy into two sectors: an automation-prone sector (APS), consisting of jobs that are easy to perform by machines, and an automation-resistant sector (ARS), consisting of jobs that are hard to perform by machines (Fig. 5.1).3 The former would, for instance, include simple manual routine tasks like