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Borrowing from Employees: Wage Dynamics with Financial Constraints

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  • Claudio Michelacci
  • Vincenzo Quadrini

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 form 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.

Suggested Citation

  • Claudio Michelacci & Vincenzo Quadrini, 2005. "Borrowing from Employees: Wage Dynamics with Financial Constraints," Working Papers wp2005_0501, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2005_0501
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    References listed on IDEAS

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    11. Zabojnik, Jan, 2014. "Stock-based Compensation Plans and Employee Incentives," Queen's Economics Department Working Papers 274650, Queen's University - Department of Economics.
    12. Javier Diaz-Gimenez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms in the U.S.: a Boon for the Income Poor," Computing in Economics and Finance 2006 400, Society for Computational Economics.
    13. Gu, Tao, 2019. "Wage determination and fixed capital investment in an imperfect financial market: the case of China," MPRA Paper 95986, University Library of Munich, Germany.
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    17. Murmann, Martin, 2017. "The Growth and Human Capital Structure of New Firms over the Business Cycle," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168290, Verein für Socialpolitik / German Economic Association.
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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