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Financial Markets and Wages

  • Claudio Michelacci
  • Vincenzo Quadrini

We study a labor 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11050.

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Date of creation: Jan 2005
Date of revision:
Publication status: published as Claudio Michelacci & Vincenzo Quadrini, 2009. "Financial Markets and Wages," Review of Economic Studies, Blackwell Publishing, vol. 76(2), pages 795-827, 04.
Handle: RePEc:nbr:nberwo:11050
Note: EFG LS
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