Optimal Consumption and Labor Choices with Learning-by-Doing

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 peoples' 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 the intertemporal 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.