Labor and Capital Dynamics Under Financing Frictions

60 Pages Posted: 11 Oct 2016 Last revised: 21 May 2018

Ryan Michaels

University of Rochester - Department of Economics

T. Beau Page

Tulane University - Finance & Economics

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: October 10, 2016

Abstract

We assemble a new, quarterly panel dataset that links firms' investment and financing to their employment and wages. In the data, wages are leverage are negatively related, both cross-sectionally and within firms. This pattern contradicts models in which firms insure workers against unemployment risk. We reconcile this fact with a model that integrates factor adjustment frictions and wage bargaining with costly external financing. In the model, the probability of default rises with debt. Because default incurs deadweight costs, the expected surplus over which firms and workers bargain falls, thus depressing wages. We show that raising financing costs reduces employment and wages, in line with recent reduced-form evidence.

Keywords: Labor and capital dynamics, Financing frictions, Wage bargaining

JEL Classification: E22, E24, G32

Suggested Citation

Michaels, Ryan and Page, Beau and Whited, Toni M., Labor and Capital Dynamics Under Financing Frictions (October 10, 2016). Available at SSRN: https://ssrn.com/abstract=2850790 or http://dx.doi.org/10.2139/ssrn.2850790

Ryan Michaels

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

Beau Page

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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