Kwabena Gyimah-Brempong
$25,000
Yajie Wang
University of Rochester
New York
Social Behavioral and Economic Sciences (SBE)
Economics
This award is funded in whole or in part under the American Rescue Plan Act of 2021 (Public Law 117-2). <br/><br/>While it has been acknowledged that volatility shocks (increasing uncertainty) can raise firms’ bankruptcy risks and generate recessions, general assumption is that labor force is perfectly insured from these bankruptcies. This assumption deviates from the notion that labor force is averse to financially distressed firms. This project will focus on this aspect by considering that labor force is aware of firms’ bankruptcy risks and require higher wages to compensate for expected losses. Within this framework, a positive volatility shock amplifies the compensating wage differentials across firms with different leverage, driving labor force reallocation from highly leveraged firms to less leveraged firms. This project will develop a model and using data on labor force; the research will test the hypothesized effect of volatility shocks on labor force reallocation. The project will explore the corresponding welfare implications, which will have potential labor market policy implications.<br/><br/>This research will use employer-employee matched data to show new empirical facts of how the relationship between volatility and labor market outcomes depends on firms’ financial conditions. The project will build on the hypothesis that higher volatility increases firms’ bankruptcy risks. Labor force is averse to firms’ bankruptcy risks. Thus, it is harder for highly leveraged firms to hire workforce, which will affect labor wages and employment. Labor force will reallocate to less leverage firms, implying the allocation of labor force across firms deviates from the optimal level. The mechanism considered in the project will be useful in explaining why the labor market was adversely affected during the financial crisis. The employer-employee matched data will be helpful in controlling the characteristics of firms and workforce. The project will explore the role of compensating wage differentials within the context of firms’ financial conditions. The research will further shed light on the role of firm heterogeneity over business cycles.<br/><br/>This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.