A poor economy has a farm sector with more workers than it needs

The economist W. Arthur Lewis split a low-income economy into two sectors. The traditional sector is subsistence farming, where so many people work the land that some add nothing to output: take them away and the harvest stays the same. Their marginal product is zero. Families share what the land produces, so each worker earns about a subsistence income.

The modern sector is industry, where firms hire workers to make a profit.

Industry can hire from the farms at a constant wage

Industrial firms need pay only a little more than subsistence income to attract workers. With surplus labour on the land, they can hire as many as they want at that wage, so labour supply to industry is horizontal, and farm output does not fall as workers leave.

Firms hire until the last worker's extra output equals the wage. Every earlier worker produces more than the wage, and the difference is profit.