Institute for Research on Labor and Employment

In medicine, law, consulting, and many other careers, a significant proportion of human capital is created through profession-specific learning-by-doing (LBD. In the absence of long-term wage contracts, if LDB effects are sufficiently large, then young workers should face a negative wage in return for high future wages. However, if workers are liquidity constrained, then young workers compete away those returns to experience by working inefficiently hard. This inefficiency results in higher lifetime earning, causes older workers to exert too little effort, and tends to lower the observable (monetary) returns to experience. Unlike traditional models, this can explain "career concerns" in professions where effort and ability are observable.