Perry & Wilson: The Accord and Strikes 245 A Two-Sector Growth Model with Labour Supply

This paper introduces endogenous time distribution between work and leisure into a two-sector growth model. We differ from the traditional growth theory in that we introduce a novel economic mechanism to determine consumers ’ decision on time distribution, consumption and saving. The utility maximization solves the problem that there is no profound rational decision mechanism for consumers in the Solow growth model and avoids the complication that the Ramsey growth theory brings about. First, we define the two-sector growth model with the alternative approach to consumer behaviour with endogenous labour supply. Then, we examine dynamic properties of the model when the production functions are specified with the Cobb-Douglas forms. We also simulate the model and demonstrate effects of changes in the propensity to save and technology of the capital good sector over time. The appendix examines dynamic properties of the model when the production functions take on general forms. 1