Financial frictions and wage inequality

This paper investigates how financial frictions affect skilled-unskilled wage inequality. In both the cost constrained model and the quantity constrained model, we find that a decrease of financial frictions in the skilled (resp. unskilled) sector will increase (resp. decrease) wage inequality when there is a properly large elasticity of substitution between capital and skilled labor (resp. unskilled labor). In sum, the role of financial frictions is sector-specific, which is largely neglected by the existing literature.