The Micro‐foundations of Dual Economy Models*

This paper provides microfoundations for dual economy models. First, the patterns of production and population growth in the traditional agricultural sector are examined. This shows the connection between long‐run per capita income and subsistence wages. Second, it proves the existence of surplus labour and defines two types of surplus labour. Third, it considers two wage determination mechanisms in the modern sector and their relationships with the requirement for labour market restrictions. Fourth, the labour market is linked to food supply. Fifth, the dynamics of surplus labour and labour transfer are considered and two types of turning point are defined.