 The Financial Channel of Wage RigidityNo 1605, 2016 Meeting Papers from Society for Economic Dynamics Abstract: Why do firms cut hiring so sharply in recessions? I propose that wage rigidity among incumbent workers forces firms to reduce hiring by squeezing their internal funds. Incumbents' wage rigidity is an irrelevant fixed cost in standard macroeconomic models, which instead rely on wage rigidity among new hires. But much empirical evidence indicates that the wages of new hires, unlike those of incumbents, display little rigidity. I integrate financial constraints and incumbents' wage rigidity -- but flexible wages among new hires -- into the Diamond-Mortensen-Pissarides matching model. The interaction between these two frictions helps the calibrated model account for more than half of hiring fluctuations in the U.S. data. My empirical analyses support the financial channel of wage rigidity. I present new firm-level evidence that employment responds to cash flow shocks, and that internal funds help firms stabilize employment during recessions. Moreover, I calculate that a slight increase in incumbents' wage procyclicality could smooth aggregate profits and internal funds. Date: 2016 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1605 Access Statistics for this paper More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC. |
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