Education and Human Capital Accumulation in a Two -Sector Growth Model with Elastic Labor Supply

Abstract

This paper proposes a dynamic economic model with wealth accumulation and human capital accumulation with elastic labor supply. The economic system consists of one production sector and one education sector. Our model is a synthesis of three main models in economic theory: Solow’s one sector neoclassical growth mode, the Uzawa-Lucas two sector model, and Arrow’s learning by doing model. The model also includes Zhang’s idea about creative leisure or learning by consuming. Demand and supply of education in our model are determined by market mechanism. The model describes dynamic interdependence among wealth accumulation, human capital accumulation, division of labor, and time distribution among leisure, education and work under perfect competition. We simulate the model and examine effects of changes in the total productivity of the education sector, the total productivity of the production sector, the propensity to obtain education, and learning efficiency in school.