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Financial Markets and Wages

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Author Info
Michelacci, Claudio
Quadrini, Vincenzo

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

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jonathan P Thomas & Tim Worrall, 2007. "Limited Commitment Models of the Labour Market," Keele Economics Research Papers KERP 2007/11, Centre for Economic Research, Keele University. [Downloadable!]
    Other versions:
  2. Vicenzo Quadrini & Claudio Michelacci, 2005. "Borrowing From Employees: Wage Dynamics With Financial Constraints," Working Papers wp2005_0501, CEMFI. [Downloadable!]
    Other versions:
  3. 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. [Downloadable!] (restricted)
    Other versions:
  4. Vincenzo Quadrini, 2004. "EconomicDynamics Interviews Vincenzo Quadrini on Firm Dynamics," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 5(2), April. [Downloadable!]
  5. Gernandt, Johannes & Pfeiffer, Friedhelm, 2005. "Einstiegslöhne bei unvollkommenen Arbeitsmärkten," ZEW Discussion Papers 05-26, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
    Other versions:
  6. Kredler, Matthias, 2008. "Experience vs. Obsolescence: A Vintage-Human-Capital Model," MPRA Paper 10200, University Library of Munich, Germany. [Downloadable!]
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