Financial Markets and Wages
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 future wages once they become
unconstrained. Because constrained firms grow faster, the model
predicts a positive correlation between the growth of wages and the
growth of the firm. Under some conditions, the model also generates
a positive relation between firm size and wages. Using matched
employer-employee data from Finland and the National Longitudinal
Survey of Youth for the US, we show that the key dynamic properties
of the model are supported by the data.