The asymmetric impact of leisure externalities on economic growth

Abstract

Leisure generates externalities for the economy as a whole, as individuals generally get some (dis-)utility from their leisure-time. However, the sign and the extent of the effect that these externalities have on a specific worker's productivity and on the productivity of all other factors used in combination with labor (hence on long-term economic growth) may be asymmetric across different economic activities. The objective of this paper is to shed light on the impact that sector-specific leisure-time externalities have on the innovation rate, on the sectorial allocation of (skilled) labor, and eventually on the long-run economic growth rate, without making any prior assumption on their sign and magnitude. In the baseline model the growth rate of per capita income moves together with all types of leisure externalities, whereas the innovation rate moves together with (and depends solely on) the R&D-sector-specific leisure externality. From numerical analyses, we conclude that sector-specific leisure-time externalities provide asymmetric effects on the growth rate of real per capita GDP and on the way skilled labor is allocated across different economic activities. The robustness of these conclusions is analyzed by using various definitions of leisure along with different utility functions (including leisure as an argument).