Chakraverty, A
(2015)
Leverage, Unemployment Risk and Employee Compensation.
Other.
Indian School of Business, Hyderabad.
(Unpublished)
Abstract
I study USA manufacturing firms to examine relation between leverage and employee compensation. I find that
workers’ wage is a function of the firm’s likelihood of bankruptcy – arising from high leverage – as well as their likelihood of finding a job elsewhere, should the firm liquidates. If firm’s leverage is high but workers’ switching cost is low, i.e. when firm goes bankrupt workers can find job elsewhere, their wage is relatively low. On the other hand, when firm has high leverage as well as there are few outside opportunities, employees’ compensation increases with leverage. In addition, using state unemployment insurance, I find that the demand for high wage arises from their demand for high premium for bearing higher unemployment risk.
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