Abstract
The paper studies the interaction between financing constraints and labor market imperfections and the role of this interaction on labor market dynamics. In the model economy, a positive productivity shock is amplified through endogenous fluctuations in the financial market. The paper shows that if wages are set via Nash bargaining, the productivity shock substantially increases wage volatility and, as a result, the shock has very little effect on firm profitability and hiring workers over the business cycle. When the model includes wage rigidities, however, firms’ profitability becomes highly responsive to productivity changes: the financial accelerator mechanism induces additional fluctuations in labor market quantities, as observed in the data.
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