I find the labor-leisure model with utility functions interesting, but I find it lacks the factor of work experience, which is very important in the real life labor market.

This is a reason people why people might start working for a lower wage or even do unpaid internships.

I tried searching for a labor-leisure model including the work experience factor in the internet but had no luck.

I remember doing the following linear regression model in econometrics:

$\log(Wage_{it}) = \alpha + \beta \cdot \log(Experience_{it}) + \epsilon_{it}$

So maybe we could solve for the wage here and plug into the usual budget constraint?

By exponentiating, we get

$w_t = w_0 {E_t}^\beta$

where $w_0 := e^\alpha$ and $E_t$ is experience, which we could define as $E_t = \sum_{k=1}^{t} L_k$ (the total amount of time worked in the agent’s lifetime)?

With this we would get

$\max \sum_{t=0}^{\infty} \beta^t [U(c_t, l_t)]$

subject to

$w_0 (\sum_{k=1}^{t} L_k)^\beta + (1+r_{t+1}) s_t = c_t + s_{t+1}$

Here $l_t := T - L_t$ is leisure, where $T$ is the time endowment on each period.

I would appreciate any insight on an extension of this kind.

  • 1
    $\begingroup$ I dont have time for full answers but there are models with experience, one example: jstor.org/stable/… $\endgroup$
    – 1muflon1
    Commented Jul 27, 2023 at 18:37
  • $\begingroup$ @1muflon1 Thank you! I'll check the paper when I have time. $\endgroup$ Commented Jul 27, 2023 at 19:02


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