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Borrowing from Employees: Wage Dynamics with Financial Constraints

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  • Claudio Michelacci

    (CEMFI,)

  • Vincenzo Quadrini

    (University of Southern California,)

Abstract

We analyze how the financial conditions of the firm affect the compensation structure of workers, the size of the firm, and its dynamics. Firms that are financially constrained offer long-term wage contracts characterized by an increasing wage profile, that is, they pay lower wages today in exchange of higher future wages, effectively borrowing from their employees. Because constrained firms also operate at a suboptimal scale, which then increases gradually over time, we have that younger and smaller firms grow faster and pay lower wages. (JEL: G31, J31, E24) Copyright (c) 2005 The European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 3 (2005)
Issue (Month): 2-3 (04/05)
Pages: 360-369

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Handle: RePEc:tpr:jeurec:v:3:y:2005:i:2-3:p:360-369

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  1. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  2. Claudio Michelacci & Vincenzo Quadrini, 2004. "Financial Markets and Wages," 2004 Meeting Papers 116, Society for Economic Dynamics.
  3. Blanchflower, D. & Oswald, A. & Garrett, M., 1988. "Insider Power In Wage Determination," Papers 319, London School of Economics - Centre for Labour Economics.
  4. Nickell, S. & Nicolitsas, D., 1995. "How Does Financial Pressure Affect Firms," Economics Series Working Papers 99170, University of Oxford, Department of Economics.
  5. Thomas Cooley & Ramon Marimon & Vincenzo Quadrini, 2003. "Aggregate Consequences of Limited Contract Enforceability," NBER Working Papers 10132, National Bureau of Economic Research, Inc.
  6. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 285-315, 04.
  7. Charles Brown & James L. Medoff, 1989. "The Employer Size-Wage Effect," NBER Working Papers 2870, National Bureau of Economic Research, Inc.
  8. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
  9. Thomas F. Cooley & Vincenzo Quadrini, 1999. "Financial Markets and Firm Dynamics," Working Papers 99-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  10. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  11. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
  12. Oi, Walter Y. & Idson, Todd L., 1999. "Firm size and wages," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 33, pages 2165-2214 Elsevier.
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Cited by:
  1. Javier Díaz-Giménez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms In The U.S.: A Boon For The Income Poor," Working Papers wp2006_0611, CEMFI.
  2. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2010. "Credit within the Firm," EIEF Working Papers Series 1008, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2010.
  3. Claus Schnabel & Susanne Kohaut & Udo Brixy, 2011. "Employment stability in newly founded firms: a matching approach using linked employer–employee data from Germany," Small Business Economics, Springer, vol. 36(1), pages 85-100, January.
  4. Jan Zabojnik, 2014. "Stock-based Compensation Plans and Employee Incentives," Working Papers 1325, Queen's University, Department of Economics.
  5. Schnabel, Claus & Kohaut, Susanne & Brixy, Udo, 2008. "Employment stability of entrants in newly founded firms : a matching approach using linked employer-employee data from Germany," IAB Discussion Paper 200809, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  6. Torben Klarl & Alfred Maussner, 2010. "Firm Heterogeneity, Credit Constraints, and Endogenous Growth," Discussion Paper Series 311, Universitaet Augsburg, Institute for Economics.
  7. Jose Ceron & Javier Suarez, 2006. "Hot And Cold Housing Markets: International Evidence," Working Papers wp2006_0603, CEMFI.
  8. Juan-José Ganuza & Gerard Llobet & Beatriz Domínguez, 2009. "R& D in the Pharmaceutical Industry: A World of Small Innovations," Management Science, INFORMS, vol. 55(4), pages 539-551, April.
  9. Aleix Calveras & Juan-José Ganuza & Gerard Llobet, 2005. "Regulation And Opportunism: How Much Activism Do We Need?," Working Papers wp2005_0508, CEMFI.

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