Learning by doing, short-sightedness and indeterminacy

Publication Title

Economic Journal

Document Type


Department or Program


Publication Date



This article introduces firm-specific learning by doing into a real business cycle (RBC) model. This assumption results in indeterminacy of the wage over a large portion of the parameter space: when firms use sufficiently high discount factors and when newly employed labour is relatively unproductive. When firms and households use the same discount factor, the effects of indeterminacy are limited to adding volatility to the wage rate. If these discount factors differ, however, then indeterminacy also destabilises newly employed labour and total hours. This result helps to explain the high amount of volatility that newly employed labour exhibits in the US data. © 2012 The Author(s). The Economic Journal © 2012 Royal Economic Society.

This document is currently not available here.