Financial Markets, Labor Markets, and Wages:Evidence, Theory, and Macroeconomic Implications

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This proposal continues the work on our prior proposal “Financial Markets, Labor Markets, and Wages: Evidence, Theory, and Macroeconomic Implications”. Our project is located at the intersection of macroeconomics, finance and labor economics and asks how firms’ financial constraints affect labor demand and wages. During the first funding phase, we developed a macroeconomic equilibrium model and confronted the model with microeconomic firm-worker data. We showed that the wage response to financial constraints matters for business cycle amplification and for policy. In the second funding phase, we want to focus on monetary policy. We ask how monetary policy affects financial constraints in heterogeneous firms and how this passes through to wages, and wage and labor heterogeneity between firms. This is important for at least two reasons: (1) to analyze how monetary policy transmits in recessions with tight financial constraints, and (2) to quantify the role of monetary policy and financial constraints for between-firm wage differentials and the resulting wage inequality. We want to continue in three steps: First, we have already created a novel data set that links firm-worker data to balance sheet information on banks. This allows a clear identification of firms’ financial constraints. Combining this with established measures of monetary policy intervention, we want to investigate how the credit channel of monetary policy affects wages. Second, we want to analyze how this transmission changes under negative policy rates. In particular, we want to investigate whether financial constraints increased because of a reduction in relationship banking. Third, we propose a novel way to jointly identify the demand and the credit channel of monetary policy and how these channels affect heterogeneous firms and between firm wage differentials.