Hidden Effort, Learning by Doing, and Wage Dynamics

M any occupations are subject to learning by doing: Effort at the workplace early in the career of a worker results in higher productivity later on.1 In such occupations, if effort at work is unobservable, a moral hazard problem arises as well. The combination of these two characteristics of effort implies that employers need to provide incentives for the employee to work hard, possibly in the form of pay-for-performance,2 while taking into account at the same time the optimal path of human capital accumulation over the duration of the contract. The recent crisis had a big impact on the labor market with high jobdestruction rates. If firm-specific human capital accumulation is important, the effect of these separations on welfare may come from several channels. A direct channel is through the loss of human capital prompted by the exogenous separation, as well as the loss in welfare from the decrease in wealth because of unemployment spells of workers. A less direct channel, but potentially an important one, is the change in the cost of providing incentives when the (exogenous to the incentive provision) separation rate increases. However, we are far from being able to understand and measure the importance of this