Optimal Consumption and Labor Choices with Learning-by-Doing

Abstract

The net accumulation of human capital through the cultivation of cognitive and non-cognitive skills and knowledge, is an important source of change in professional and personal people’s life. Past work experience has a direct effect on wage levels and their growth; thus, it influences the achievable level of consumption and leisure and lifecycle wealth. This paper analyzes the relation between labor supply, consumption and human capital accumulation in a dynamic learning-by-doing setting. We model in a continuous time framework, the optimal control problem of a household that takes decisions on the level of consumption and labor supplied to maximize logarithmic utility from consumption and leisure subject to the constraints arising from inter-temporal accumulation of human and liquid wealth. We analyze an optimal learning-by-doing program in a deterministic framework, determine explicitly the optimal control policies and comment on their economic implications.

Keywords: Human capital, Learning-by-doing, Consumption, Labor supply, Dynamic programming

JEL Classification: C61, J24, J31.