Working Paper: NBER ID: w11050
Authors: Claudio Michelacci; Vincenzo Quadrini
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: labor market equilibrium; financial constraints; firm size; wages; long-term contracts
JEL Codes: G31; J31; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financially constrained firms (G32) | lower wages today (J31) |
| lower wages today (J31) | higher wages in the future (J39) |
| firm size (L25) | higher wages (J39) |
| financially constrained firms (G32) | suboptimal scale (L25) |
| fast-growing firms (M13) | lower wages initially (J31) |
| firm growth rates (L25) | wages (J31) |
| firm growth rates (L25) | returns to tenure (J63) |
| financial constraints (H60) | wage dynamics (J31) |