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May 30, 2018


Financial frictions and wages


May 30, 2018


Joan Robinson Room
DIW Berlin
Room 3.3.002a
Mohrenstraße 58
10117 Berlin


Britta Gehrke, Friedrich-Alexander-University Erlangen-Nürnberg

This paper aims at analyzing the interaction between financial 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 firms' balance sheets. Controlling for firm characteristics and time fixed effects, we find that higher leverage (as a measure for financial frictions) implies on average lower wages. To explain this empirical result, we build a theoretical model with labor market frictions and monitoring cost in the financial market. We show that wages react differently to financial frictions depending on whether firms use external borrowing to finance vacancy posting costs only or also the wage bill (as well as vacancy costs). If firms need to finance their wage bill, financial frictions induce a wedge between productivity and wages. Contrary to the existing literature, the model implies higher employment volatility with less rather than more rigid wages.


Britta Gehrke, Friedrich-Alexander-University Erlangen-Nürnberg


Geraldine Dany-Knedlik
Geraldine Dany-Knedlik

Head of Forecasting Department in the Macroeconomics Department