Financial shocks, wage-setting and employment

The paper investigates the employment effects of changes in interest rate, availability of credit, internal net worth, market power and debt-equity ratio. A model of an oligopolistic risk averse firm is used as an analytical framework, combined with a Nash bargain over wage. The analysis suggests that employment is highly sensitive to changes in financial factors, and that this sensitivity increases with indebtedness. The main reasons for the result are the assumptions of (1) the decisive role of investment in employment determination in long run and (2) credit rationing. The result emphasizes the importance of monetary policy when aggregate employment is concerned.