 |
This paper analyzes the interaction between nancial frictions and
wages. We use a large data set for Germany for 2006 to 2014 that combines
administrative data on workers and wages with detailed information
on rms' balance sheets. Controlling for rm characteristics and time xed
eects, we nd that higher leverage (as a measure for nancial frictions)
implies on average lower wages. We build a theoretical model with labor
market frictions and monitoring costs in the nancial market. We show
that wages react dierently to nancial frictions depending on whether
and how they aect the relative costs of wages and hiring and the surplus
of the job. We further show how employment volatility depends on these
dierent mechanisms and document how higher employment volatility can
be related to less rather than more rigid wages. Our empirical results then
identify these dierent mechanisms in the data.
