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Financial Markets and Wages

Author

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  • Claudio Michelacci
  • Vincenzo Quadrini

Abstract

We study the optimal long-term contract offered to workers when firms are financially constrained in their investment plans. To alleviate the tightness of the financial constraints, firms promise an increasing wage profile to workers, that is, they pay lower wages today in exchange of higher future wages. Because firms with tighter financial constraints are also smaller, the wages paid in small firms are lower than the in large firms, and therefore, the model generates a positive relation between the size of the firm and the average wages paid to workers (wage-firm size relation). The model also captures other empirical regularities such as the lower wages paid by fast growing firms and firms in financial distress.

Suggested Citation

  • Claudio Michelacci & Vincenzo Quadrini, 2004. "Financial Markets and Wages," 2004 Meeting Papers 116, Society for Economic Dynamics.
    • Handle: RePEc:red:sed004:116
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    More about this item

    Keywords

    Investment financing; long-term contracts; dynamics of wages;
    All these keywords.

    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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