Financial Markets and Wages

Michelacci, Claudio; Quadrini, Vincenzo

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Financial Markets and Wages

48 Pages Posted: 13 May 2005

See all articles by Claudio Michelacci

Claudio Michelacci

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR)

Vincenzo Quadrini

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: January 2005

Abstract

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.

Keywords: Investment financing, long-term contracts, wages

JEL Classification: E24, G31, J31

Suggested Citation: Suggested Citation

Michelacci, Claudio and Quadrini, Vincenzo, Financial Markets and Wages (January 2005). Available at SSRN: https://ssrn.com/abstract=722464