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Financial frictions and wage inequality

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  • Jiancai Pi
  • Yanwei Fan

Abstract

This paper investigates how financial frictions affect skilled‐unskilled wage inequality. In both the cost constrained model and the quantity constrained model, we find that a decrease of financial frictions in the skilled (resp. unskilled) sector will increase (resp. decrease) wage inequality when there is a properly large elasticity of substitution between capital and skilled labor (resp. unskilled labor). In sum, the role of financial frictions is sector‐specific, which is largely neglected by the existing literature.

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  • Jiancai Pi & Yanwei Fan, 2022. "Financial frictions and wage inequality," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1064-1074, January.
    • Handle: RePEc:wly:ijfiec:v:27:y:2022:i:1:p:1064-1074
    DOI: 10.1002/ijfe.2200
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