Finance and Economics Discussion Series (FEDS)

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August 2017 (Revised August 2019)

Firm Leverage, Labor Market Size, and Employee Pay

Timothy E. Dore and Rebecca Zarutskie

Abstract:

We provide estimates of the wage costs of firms' debt exploiting within-firm variation in workers' expected unemployment costs due to variation in local labor market size. We find that, following an increase in firm leverage, workers with higher unemployment costs experience higher wage growth relative to workers at the same firm with lower unemployment costs. Our estimates suggest wage costs are an important component in the cost of debt; a 10 percentage point increase in firm leverage increases wages for the median worker by 1.9% and increases total firm wage costs by 17 basis points of firm value.

Accessible materials (.zip)

Original paper: PDF | Accessible materials (.zip)

Keywords: Capital structure, Costs of financial distress, Wages and compensation

DOI: https://doi.org/10.17016/FEDS.2017.078r1

PDF: Full Paper

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Last Update: April 02, 2020