Borrowing from Employees: Wage Dynamics with Financial Constraints

We analyze how the financial conditions of the firm affect the compensation structure of workers, the size of the firm, and its dynamics. Firms that are financially constrained offer long-term wage contracts characterized by an increasing wage profile, that is, they pay lower wages today in exchange of higher future wages, effectively borrowing from their employees. Because constrained firms also operate at a suboptimal scale, which then increases gradually over time, we have that younger and smaller firms grow faster and pay lower wages. (JEL: G31, J31, E24) Copyright (c) 2005 The European Economic Association.

[1]  J. Jimeno,et al.  Spanish Unemployment: The End of the Wild Ride? , 2003, SSRN Electronic Journal.

[2]  Walter Y. Oi,et al.  Firm size and wages , 1999 .

[3]  R. Albuquerque,et al.  Optimal Lending Contracts and Firm Dynamics , 2002 .

[4]  Gordon R. Hanka,et al.  Debt and the terms of employment , 1998 .

[5]  Jesus M. Carro.  Estimating Dynamic Panel Data Discrete Choice Models with Fixed Effects , 2003 .

[6]  Thomas F. Cooley,et al.  Financial Markets and Firm Dynamics , 1999 .

[7]  Vincenzo Quadrini.  Investment and liquidation in renegotiation-proof contracts with moral hazard , 2004 .

[8]  Francisco Peñaranda.  ARE VECTOR AUTOREGRESSIONS AND ACCURATE MODEL FOR DYNAMIC ASSET ALLOCATION , 2004 .

[9]  J. Córdoba,et al.  Credit Cycles , 2003 .

[10]  Thomas F. Cooley,et al.  Aggregate Consequences of Limited Contract Enforceability , 1999, Journal of Political Economy.

[11]  Claudio Michelacci,et al.  Financial Markets and Wages , 2005 .

[12]  John E. Core,et al.  Stock Option Plans for Non-Executive Employees , 2000 .

[13]  O. Hart,et al.  A Theory of Debt Based on the Inalienability of Human Capital , 1991 .

[14]  Alan B. Krueger,et al.  EFFICIENCY WAGES AND THE INTER-INDUSTRY WAGE STRUCTURE , 1988 .

[15]  James L. Medoff,et al.  The Employer Size-Wage Effect , 1989, Journal of Political Economy.

[16]  Ana Fernandes,et al.  Knowledge, Technology Adoption and Financial Innovation , 2005 .

[17]  Stephen Nickell,et al.  How does financial pressure affect firms , 1995 .

[18]  A. Oswald,et al.  Insider Power in Wage Determination , 1989 .

[19]  J. Abowd,et al.  Inter-industry and Firm-size Wage Differentials: New Evidence from Linked Employer-Employee Data , 2000 .