Research Article | Open Access

F. Grassetti, C. Mammana, E. Michetti, "On the Effect of Labour Productivity on Growth: Endogenous Fluctuations and Complex Dynamics", *Discrete Dynamics in Nature and Society*, vol. 2018, Article ID 6831508, 9 pages, 2018. https://doi.org/10.1155/2018/6831508

# On the Effect of Labour Productivity on Growth: Endogenous Fluctuations and Complex Dynamics

**Academic Editor:**Josef Diblík

#### Abstract

This paper introduces a sigmoidal production function that considers production possible even when the only input is labour. The long-run behaviour of an economy described by the neoclassical Solow-type growth model with differential savings is investigated considering the technology presented. It is found that labour productivity influences the existence of boom and bust periods as well as the level of capital per capita in equilibrium.

#### 1. Introduction

Economic growth models explain a country’s capital accumulation over time. One of the most used neoclassical models is the model developed by Solow and Swan (see Solow [1] and Swan [2]). The Solow-Swan model considers the growth rate of labour, the depreciation rate of capital, the saving rate, and the technology of production as determinants of the long-run behaviour of an economy. An extension of the Solow model considers two different saving propensities for workers and shareholders (see Böhm and Kaas [3]).

In literature, different technologies have been studied in the Solow framework to analyse the evolution of capital per capita over time. Production technologies with Constant Elasticity of Substitution between production factors (see Brianzoni [4, 5], Masanjala and Papageorgiou [6], and Papageorgiou and Saam [7]) and Variable Elasticity of Substitution (see Brianzoni et al. [8], Cheban et al. [9], and Karagiannis et al. [10]) have been considered in order to verify which parameters influence the generation of cycles and of more complex dynamics for an economy. It has been found that nonsimple dynamics arise when the elasticity of substitution is sufficiently low and shareholders save more than workers. Moreover, attention has been paid to sigmoidal production functions (see Brianzoni et al. [11, 12]), since they are able to describe growth dynamics of nondeveloped and developing countries.

In all the above-mentioned works the technology considered, , satisfies , where is the capital per capita. Therefore, all those works provide a production rule for which no capital can be generated without capital. Thus, they do not take into consideration a possibility of deriving from one of the assumptions of the Solow model: in his work, Solow [1] defined the capital stock as the amount of already-produced output. This implies that an initial production of capital should be possible when the only production factor is labour. Moreover, it is known that nondeveloped countries may base their early stage development only on labour (agriculture and handicraft manufacture), as Azariadis and Stachurski [13]) discussed.

In this paper we present a sigmoidal technology that satisfies , providing the condition for an initial amount of production possible without capital. We then investigate the Solow-type model with differential savings considering the technology introduced, in order to verify how the long-run behaviour of an economy is influenced by labour productivity (a measure of the quantity of output that can be produced from labour).

The rest of the paper is organised as follows. In Section 2 we describe the production function, in Section 3 we study the existence and stability of the steady states, while in Section 4 we investigate the influence of labour productivity on long-run dynamics. Section 5 concludes the paper.

#### 2. Model Setup

Nonconcave production functions are used in literature to describe countries with a low level of economic development, since they present increasing returns to scale at an early stage of development and diminishing ones at a later stage (see, among all, Skiba [14] who introduced them). Capasso et al. [15] presented the sigmoidal production function mapping capital per worker into output per worker, as given bywhere and are nonnegative and is the output elasticity of capital. Notice that an inflection point exists such that is convex for and it is concave for with , so it is a convex-concave production function. Such a function can be considered an extension of the Cobb–Douglas (CD) production function, since it approximates the CD case when and . Notice that does not fulfil the Inada Conditions (see Barro and Sala-i Martin [16]), being . The S-shape behaviour of the function allows us to consider less-developed countries, but it does not take into account those economies driven by craftsmanship, i.e., in which low levels of output are possible even without capital, that is, with . In order to consider these economies, we add a positive constant to the sigmoidal production function. The resulting shifted sigmoidal (SS) production function is given byand its graph is in Figure 1(a).

**(a)**

**(b)**

Notice that when the SS production function is considered, production is possible without capital, being . This kind of technology has been already considered in literature when studying the evolution of capital per capita over time (see, among all, the Nobel Prize Solow [1]).

We now consider the wage of a worker. When the per capita wage of a worker equals the marginal product of labour, that is, , and the SS production function is considered, then the wage is given bybeingIn order for the wage to be nonnegative, we assume , so that the minimum point of is either positive or equal to zero. This consideration establishes an economically meaningful lower bound of for the setup, as stated in the following remark.

*Remark 1. *The shifted sigmoidal production function (SS) is given bywhere , , , and for the wage being nonnegative.

As it can be observed in Figure 1(a), the SS production function describes economies in which output is generated even without capital. Recall that the elasticity of substitution (ES) between production factors measures the ease with which capital and labour can be substituted for one another and, for twice differentiable production functions, it is mathematically defined by (see Sato and Hoffman [17]): Beingand the SS production function as given by (2), the resulting ES isTherefore, this production function belongs to the class of VES (Variable Elasticity of Substitution) production functions, since depends on the capital per capita level. Notice that the ES may be negative. Production functions with negative ES between inputs can be found in literature (see, among all, Prywas [18], Thompson and Taylor [19], Jurgen [20], and Grassetti et al. [21]). The work of Paterson [22] suggests that such eventuality occurs when production inputs are complementary.

Consider now the Solow-Swan-type growth model in which workers and shareholders have different but constant saving rates (respectively, and ) and assume that shareholders receive the marginal product of capital , while the wage rate equals the marginal product of labour. Following Böhm and Kaas [3], the map describing the capital accumulation over time is then given bywhere the labour force grows at a rate and is the depreciation rate of capital.

In order to consider less-developed economies, in which production is possible using only labour, we assume that the technology is described by the SS production function as defined in (5). Consequently, the per capita wage of workers is given in (3), while the income per worker of a shareholder is given byTaking into account (9), (3), and (10), the final continuous and smooth one-dimensional map describing the capital per capita evolution is given bywhere for all combinations of parameter values. Notice that in Brianzoni et al. [11], where a sigmoidal production function is considered, the condition is required in order to assure that is nonnegative for all . Differently, if the SS production function (as defined in Remark 1) is considered, then the final map has always economic meaning, thus allowing us to consider both cases and and, therefore, this can be considered a generalisation of the previous work. This is possible because capital is not an essential input for production and hence even an economy where shareholders are not saving can be considered.

#### 3. Equilibria and Local Dynamics

In this section we consider the question of the existence and stability of steady states for an economy described by the Solow-Swan growth model with differential savings as proposed in Böhm and Kaas [3], while considering the SS production function as defined in Remark 1.

##### 3.1. Existence of Steady States

We now analyse the number of steady states map may own, considering different conditions on parameters values.

The first difference from most of the models that consider the same initial framework (see, among all, Brianzoni et al. [12] and Klump and de La Grandville [23]) concerns the existence of a steady state characterised by zero capital per capita. While previous works established the existence of this equilibrium, when the SS production function is considered, the origin is not a fixed point, being . This happens when production is possible without capital (i.e., only labour is necessary), as the works of Solow [1] and Miyagiwa and Papageorgiou [24] demonstrate. Notice that this model better describes the behaviour of nondeveloped economies: even in those countries in which only labour is available (no infrastructures, machineries, or investments are given), a minimum level of production is possible, i.e., agriculture and handicraft manufacture (with regard to the early stages of economic development see Azariadis and Stachurski [13]). While Brianzoni et al. [11] proved that, when the sigmoidal production function given by (5) is considered, a poverty trap exists (the origin is a stable fixed point); this work found that, if a technology in which the only necessary input factor is labour is considered, the existence of the ’vicious circle of poverty’ (see Azariadis and Stachurski [13]) can be avoided. Notice that, even though an economy in which only labour is given will not converge to a zero growth rate, attention should be paid to the existence of multiple positive steady states: different equilibrium levels of capital per capita would explain the coexistence of nondeveloped, developing, and developed countries.

To this aim we now consider the following functions:andwith . Then the fixed points of (11) are the solutions of equation , .

As far as the properties of function are concerned, the following proposition holds.

Proposition 2. *Function as given by (12) is defined , it is continuous and differentiable such that . Furthermore, there exist such that *(i)*if , then admits a unique maximum point ;*(ii)*if , then admits a minimum point and a maximum point , .*

*Proof. *The first part is trivial. As far as the number of critical points of is concerned, it is possible to write where is given by (1), , , , and .(i)Consider , then admits a unique maximum point given by as it was proved in Brianzoni et al. [11].(ii)Consider , then , while can be positive or negative. Define and notice that . Then(a)if , i.e., , the equation admits a unique positive solution; hence admits a unique maximum point ;(b)if , may admit two, one, or zero solutions, depending on the sign of . Notice that iff . After some computations, it can be observed that this inequality is always verified; hence, if , then admits two solutions. The minimum and maximum points are given, respectively, by and , where .

Taking into account Proposition 2 and considering that given by (13) is a hyperbola with , , , , and , then the following proposition holds.

Proposition 3. *Map given by (11) admits at least one positive fixed point and at most three positive fixed points.*

*Proof. *Recall that is concave, and . (i)Assume . Then is bimodal with . Then(a)if no intersection exists in . Moreover, if , one intersection exists in and at most two intersections may exist in , whereas if , no intersection exists in and from one up to three intersections exist in ;(b)if , one intersection exists in . Moreover, if , one intersection exists in and one in , whereas if , at most two intersections exist in and no intersection exists in .(ii)Assume . Then is unimodal with maximum point . Then(a)if , from one up to three intersections exist in and no intersection exists in ;(b)if , one intersection exists in . Moreover at most two intersections exist in .

Notice that points and determine the position of the higher equilibrium: whatever the saving propensity of shareholders, when , one fixed point exists in the interval , while no fixed points exist in that interval otherwise.

Differently from previous models using this initial framework, when production is possible even without capital, the origin is not a fixed point. Moreover, up to three fixed points may exist (see Figure 1(b)). Notice that the number of fixed points is in agreement with that obtained by Brianzoni et al. [8] and Grassetti et al. [21] considering different types of VES production functions, but, whereas in previous works the condition was required, in this case multiple equilibria may exist even if workers save more than shareholders.

##### 3.2. Local Dynamics

Function as given by (11) can be written in terms of function as follows:HencewhereNotice that ; hence , that is, s.t. is strictly increasing . Since , then s.t. is strictly increasing . Hence, taking into account also the properties of function , two cases may occur: is strictly increasing or is bimodal; i.e., it admits a minimum point and a maximum point . The following proposition holds.

Proposition 4. *Consider as given by (11). If , then is strictly increasing.*

*Proof. *If and , then .

Proposition 4 establishes a sufficient condition for the strict monotonicity of : if this condition is not fulfilled, map can be strictly increasing or bimodal. Notice that, when the condition of Proposition 4 holds and only one equilibrium exists, the long-run behaviour of an economy can be easily understood, as the following proposition states.

Proposition 5. *Assume , and let be the unique fixed point of map . Then is globally stable.*

*Proof. *From Proposition 4 it is known that, when , . Moreover, and . Being the only fixed point of , i.e., , then and hence is globally stable.

Recall from Proposition 3 that map may have from one up to three fixed points. When the condition of Proposition 4 holds and has one fixed point, then it is* globally stable*. Modifying the parameter values, a* fold bifurcation* occurs (when parameters reach the bifurcation values, one nonhyperbolic fixed point is created) and a pair of fixed points emerges so map has three fixed points (see Figure 1(b)). Being increasing, the fixed points are alternatively stable and unstable, with the unstable equilibrium that separates the basins of attraction of and . Notice that, when 3 fixed points exist the model simultaneously explains the behaviour of economies that, starting from different initial conditions, reach different equilibria level of capita per capita in the long-run.

We now focus on the role of labour productivity on growth. Notice that the productivity of labour is the measure of the amount of output produced with one hour’s labour. Moreover, the existence of a positive relation between labour productivity and wage has been demonstrated (see Meager and Speckesser [25]). For the SS production function it has ; therefore parameter influences the production without capital: when the only input of production is labour, the higher the value of , the higher the value of output for the economy. Moreover, considering the wage equation as given by (3), it follows that , so a positive correlation between and is evident. Given these considerations, can be seen as an indirect measure of labour productivity. The following proposition highlights the role played by parameter on the existence and position of the equilibrium level of an economy.

Proposition 6. *Consider two economies described by SS technology and differing only in the constant , both with only one equilibrium level for capital per capita. Then the one with higher production without capital (i.e., higher value of ) will experience a higher level of capital per capita in the steady states.*

*Proof. *As the proof of Proposition 3 showed, the locations of the steady states depend on the intersection between and . Recall that has a maximum point and can have a minimum point . Moreover, while is strictly increasing with and . Notice that parameter has no effect on the shape of function , while , so that shifts downward as increases. Therefore, when only one intersection between and exists, a higher value of determines a higher value of the intersection point.

The previous proposition demonstrates a positive correlation between labour productivity and the value of the capital stock for the higher steady state. This result is in agreement with the Organisation for Economic Cooperation and Development (OECD) data: as it can be seen in Figure 2, the years of economic crisis are related to lower levels of labour productivity.

Notice that the condition of Proposition 4 is fulfilled when . Therefore, when the saving behaviours of the two income groups are similar, the economy does not experience boom and bust periods (since is strictly increasing, no fluctuation can be generated). To investigate the appearance of fluctuations, we now prove that function may be unimodal, depending on parameter values.

Proposition 7. *Consider and as given, respectively, by (11) and (17). Define and assume and .**Map is bimodal with if one of the following conditions holds: *(i)*;*(ii)* Map is strictly increasing otherwise.*

*Proof. *Recall (16). The critical points of are solutions of . Notice that . Moreover, , where and therefore iff that is for and . Assume and notice that . Then (i)if , function is negative and it has one minimum point given by . Therefore intersects the negative and constant function iff ;(ii)if , function is negative and it has one minimum point given by . Therefore intersects the negative and constant function iff .

If neither conditions of Proposition 7, (i) or (ii) are fulfilled, map is strictly increasing and the same considerations derived from Proposition 4 hold: only convergence to a positive equilibrium is possible and no complex dynamics may emerge. Notice that when the system has three fixed points, a policy increasing the capital per capita would push the economy to the higher equilibrium level. On the other hand, when is bimodal, parameter influences the existence of a globally stable fixed point, as the following proposition states.

Proposition 8. *Let as given by (11) be bimodal with minimum point . Then s.t., if , map has one fixed point and it is globally stable.*

*Proof. *When one of the conditions of Proposition 7 holds, map is bimodal with . Notice that , therefore s.c. if . Being and , it follows that one fixed point exists and it is globally stable.

As demonstrated by Proposition 8, when the output productivity is sufficiently high, the convergence to the equilibrium level is guaranteed. This result is in line with that obtained by Tugcu [26]: considering a binary dependent variable model, he found that a higher expenditure in secondary education, health, and R&D (i.e., policies that increase labour productivity) pushes the economy out of the middle trap (the phenomenon for which an economy gets stuck when it achieves the middle-income status) and towards higher levels of income.

In order to observe fluctuations and more complex dynamics, map has to be nonmonotonic. Notice that several works (see, among all, Brianzoni et al. [8] and Tramontana et al. [27]) demonstrate that cycles and chaotic dynamics appear when the ES between production factors is sufficiently low. Therefore, we now investigate the role of the output elasticity of capital on the shape of .

Proposition 9. *Let be as given by (11) and assume or . Then s.t. map is bimodal .*

*Proof. *Recall from Proposition 7 that is bimodal if or , where . Moreover , , and ; therefore s.t. the minimum point of is below the constant function for all .

Proposition 9 establishes a necessary condition for the arising of fluctuations, cycles, and complex dynamics, that is, a sufficiently high and sufficiently different saving behaviours between workers and shareholders. In this section we showed that, when the SS production function is considered in the Solow-type growth model with different saving propensities between workers and shareholder, from one up to three equilibria exist for the capital per capita level. Differently from previous works, in which production is not possible without capital, the origin is not a fixed point: thanks to labour productivity, even a country in which only labour is available for production can experience economic growth. Notice that in neoclassical growth models the stock of capital (from which the capital per capita derives as a ration between capital and labour) is defined as the stock of the already-produced commodities (see Solow [1]). Given this definition, an initial condition in which the first unit of capital was produced must exist. In contrast to this requirement, previous literature considers the condition as a fixed point, implying that if no "already-produced" goods exist, no goods can be produced. Our result overcomes the lack of previous works. Furthermore, we found that the productivity of labour positively influences the existence and stability of a high equilibrium level for the economy. In the next section, thanks to numerical simulations, we analyse the influence of the elasticity of substitution between production factors and labour productivity on the existence of fluctuations for an economy.

#### 4. Fluctuations and the Role of Labour Productivity

The aim of this section is to investigate the factors that may influence the generation of boom and bust periods for an economy. As discussed in the previous section, fluctuations and complex dynamics may arise only if the difference between saving propensities of workers and shareholders is sufficiently high or is high enough. Therefore, in the following we consider the case in which one of the conditions (i) or (ii) given in Proposition 7 holds.

Notice that cycles and chaotic dynamics arise when a fixed point loses stability via flip bifurcation; i.e., passes the value , since a fixed point placed on the decreasing branch of map is required. Thus, a necessary condition for fluctuations is . Assume to be a fixed point, then, considering Proposition 3 and being and , it follows that up to two more fixed points may exist and, given the monotonicity of for and , the number of fixed points determines their stability: if one fixed point exists, it is nonhyperbolic, while if two fixed points and exist, they are, respectively, stable and unstable (in Figure 3 the cases and are depicted, respectively, in panels (a) and (b)).

**(a)**

**(b)**

The previous considerations are summarised in the following proposition.

Proposition 10. *Assume bimodal with . Then map has one fixed point with . Moreover three cases may occur: *(a)*no other fixed point exists;*(b)*a nonhyperbolic fixed point exists;*(c)*two fixed points and exist, with stable and unstable.*

Therefore, a multistability phenomenon may occur (see Figure 4 panel (b)) and the model is able to explain why economies starting from different capital per capita levels may experience different long-run behaviours. This situation is depicted in Figure 5: starting from different initial conditions, two different attractors (in black and blue) may be reached.

**(a)**

**(b)**

**(a)**

**(b)**

Given the form of , an analytical study of the influence that parameters have on the loss of stability for the equilibrium is not possible. Therefore, we analyse this influence thanks to numerical simulations.

Figure 5(a) shows that the elasticity of substitution between production factors influences the generation of chaotic dynamics, as previous works demonstrated while considering economies in which capital is necessary for production. A different role is, instead, played by parameter , which is related to labour productivity. Numerical simulations (an example is given in panel (b) of Figure 5) showed that fluctuations arise for low values of . Moreover when the productivity of labour is sufficiently high, the attractor is a fixed point, no cycles can be generated, and the value of capital per capita in equilibrium increases if increases, since if is sufficiently high and is bimodal, . Given these results, an economic policy that increases the productivity of labour would push an economy out of boom and bust periods and increase the level of capital per capita in equilibrium.

#### 5. Conclusions

In this work we introduced a technology that considers production possible even if the only input is labour, making criticism of the production functions previously used in economic growth models. We then investigated the long-run dynamics of the Solow-type growth model with differential savings between workers and shareholders, considering the function presented. Differently from previous works, we found that the origin is not a fixed point: when in the early stage of development an economy may produce only with labour, a positive evolution of capital per capita is observed. We showed that fluctuations may arise if the difference between saving propensities is sufficiently high. Moreover, we showed that an economic policy intended to increase labour productivity would push an economy out of boom and bust periods and increase the level of capita per capita in the equilibrium.

#### Data Availability

The data used to support the findings of this study are included within the article.

#### Disclosure

This paper did not receive specific funding and was performed as part of the employment of the authors to University of Macerata.

#### Conflicts of Interest

The authors declare that there are no conflicts of interest regarding the publication of this paper.

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#### Copyright

Copyright © 2018 F. Grassetti et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.