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Financial Markets and Wages

  • Michelacci, Claudio
  • Quadrini, Vincenzo

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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