Decreasing Labor Supply, R&D-Based Growth, and Instability of Economic Dynamics

Working time has gradually decreased in the last few decades, along with the continuing growth of advanced economies. Furthermore, there have been some empirical evidence showing emerging economies’ and long-run experiences of advanced economies’ decreasing labor in spite of restrictions on labor statistics. To replicate these phenomena, we develop the model with endogenous technogical chnage and endogenous labor supply, and we find that adding increasing returns of R&D (reasech and development) efficiency, at least for the small input, yields the economic path accompany the decreasing labor supply. Furthermore, the path is stable (not saddle stable), so the steady state has multiple paths under rational expectations, which yields local indeterminacy. This would reflect the modern intermittently-coming economic shocks in both advanced and emerging countries. Furthermore, the model also contains a steady state with no growth trap, and selection among steady states is possible. The model has global indeterminacy, which would be one of the mechanisms for the start of economic growth.