Multiperiod Wage Contracts and Productivity Profiles

Creditors do not generally honor human capital as collateral. This paper demonstrates how long term wages contracts between workers and firms can circumvent the capital market imperfection. Generation of firm specific skills creates an economic bond between worker and firm. This bond enables the firm to transfer loans to an impatient worker in the form of wages in excess of what the worker is initially worth to the firm. Subsequently, the value of the worker's marginal product to the employer exceeds his spot market value enabling the firm to recoup its loans to the worker through lower wages and still retain his services. The model can be used to identify unobserved increments in a worker's general skills from the observed wage path, and to explain interindustry disparities in wage paths and statistical discrimination by firms.