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.