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Financial Markets and Wages

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  • Michelacci, Claudio
  • Quadrini, Vincenzo

Abstract

We study a labour market equilibrium model in which firms sign optimal long-term contracts with workers. Firms that are financially constrained offer an increasing wage profile: they pay lower wages today in exchange of higher wages once they become unconstrained and operate at a larger scale. In equilibrium, constrained firms are on average smaller and pay lower wages. In this way the model generates a positive relation between firm size and wages. Using data from the National Longitudinal Survey of Youth (NLSY) we show that the key dynamic properties of the model are supported by the data.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4867.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4867

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Keywords: investment financing; long-term contracts; wages;

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References

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Citations

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Cited by:
  1. Vincenzo Quadrini, 2004. "EconomicDynamics Interviews Vincenzo Quadrini on Firm Dynamics," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 5(2), April.
  2. Udo Brixy & Susanne Kohaut & Claus Schnabel, 2007. "Do Newly Founded Firms Pay Lower Wages? First Evidence from Germany," Small Business Economics, Springer, vol. 29(1), pages 161-171, June.
  3. Johannes Gernandt & Friedhelm Pfeiffer, 2006. "Einstiegslöhne bei unvollkommenen Arbeitsmärkten," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(2), pages 147-172, 05.
  4. Jonathan Thomas & TIm Worrall, 2007. "Limited Commitment Models of the Labour Market," ESE Discussion Papers 176, Edinburgh School of Economics, University of Edinburgh.
  5. Claudio Michelacci & Vincenzo Quadrini, 2005. "Borrowing from Employees: Wage Dynamics with Financial Constraints," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 360-369, 04/05.
  6. Kredler, Matthias, 2008. "Experience vs. Obsolescence: A Vintage-Human-Capital Model," MPRA Paper 10200, University Library of Munich, Germany.
  7. Eisfeldt, Andrea L. & Rampini, Adriano A., 2007. "New or used? Investment with credit constraints," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2656-2681, November.

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