Rent-Sharing, Financial Pressures and Firm Behavior

Abstract

Rent-sharing and the financial situation of the firm, measured by interest expenses as a proportion of the cash flow, are shown to he important determinants of labor demand and wage formation in the considered large firms in Finland. The sensitivity of wages to profits ( quasi-rents) can he explained by rent-sharing between employers and employees (labor union), since the time lag is relatively short. The firm’s financial position explains a substantial share of labor and wage variability. The size of firm is an i.mportant factor: the largest firms have accommodated their labor demand during and after the 1990’s deep recession. The largest firms have greater opportunities to shift production abroad that can have similar effects as the threat of bankruptcy. This has not, however, lead to greater wage elasticity. In the second-largest firms the rent sharing model is more strictly applicable. In these firms wages are more flexible than labor demand. Thls is not, however, rmambiguous consequence of rent-sharing, since the threat of bankruptcy also affects labor demand.

• ISSN: 1236-7184
• ISBN: 952-5071-14-6
• JEL: J23, C33, G32, E24
• Publication in PDF-format