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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Firm Leverage, Labor Market Size, and Employee Pay
Timothy E Dore
Rebecca Zarutskie
Abstract

We provide new estimates of the wage costs of firms' debt. Our empirical approach exploits within-firm geographical variation in workers' expected unemployment costs due to variation in local labor market size and uses a large representative sample of public firms. 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. Overall, our estimates suggest that a 10 percentage point increase in leverage increases wage compensation for the median worker by 1.9% and total firm wage costs by 17 basis points of firm value.


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Timothy E Dore & Rebecca Zarutskie, Firm Leverage, Labor Market Size, and Employee Pay, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-078, 08 Aug 2017.
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Keywords: Capital structure ; Costs of financial distress ; Wages and compensation
DOI: 10.17016/FEDS.2017.078
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