Financial frictions and wage inequality

Jiancai Pi and Yanwei Fan

International Journal of Finance & Economics, 2022, vol. 27, issue 1, 1064-1074

Abstract: This paper investigates how financial frictions affect skilled‐unskilled wage inequality. In both the cost constrained model and the quantity constrained model, we find that a decrease of financial frictions in the skilled (resp. unskilled) sector will increase (resp. decrease) wage inequality when there is a properly large elasticity of substitution between capital and skilled labor (resp. unskilled labor). In sum, the role of financial frictions is sector‐specific, which is largely neglected by the existing literature.

Date: 2022
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