Increasing Returns, Specialization, and the Theory of the Allocation of Time

Abstract

This paper develops a general equilibrium model to analyze the interactions between the division of labor based on endogenous comparative advantage and the allocation of time. The model follows the assumption of consumption technology in Becker [1965] and the trichotomy assumption on the time allocation in Gronau [1977], and demonstrates a process in which the productivity of time, the time spent at each consumption activity, the time spent at all consumption activities, consumption variety, and percapita real income increase as transaction efficiency is improved. We find that labor supply and wage rate increase concurrently as the division of labor evolves. The labor supply will be rigid regardless of the level of the wage rate if the economy has reached complete division of labor. Our model also shows that increases in the preference for time-intensive consumption can increase the labor supply and the productivity if the degree of economies of complementarity is sufficiently significant. The labor supply will bend back as the preference for time-intensive consumption increases if the economy has exhausted the potential for further division of labor.