Financial Constraints, Wages and Macroeconomic Implications

How do individual wages adjust to changes in financial constraints at the firm-level and what does this imply about aggregate wage dynamics in recessions with tight financial constraints? We derive testable implications for different theoretical mechanisms and estimate these based on German administrative data on workers, firms and detailed information on the balance sheets of firms. We link our micro-estimates to aggregate volatility of wages and unemployment in a model with labor market and financial frictions. Larger financial constraints induce lower wages, and wages are more volatile in financial recessions. Financial constraints render hiring subsidies in financial recessions less effective