A previous version of this working paper was published in January 2019.

The constraints reduce wages, as firms exploit their monopsony power over their existing workers, rendering wages less responsive to productivity in doing so. They also give rise to a time inconsistency in the dynamic firm problem, as firms face a less elastic labor supply in the short run than the long run, making commitment to future wages valuable. Constrained firms find it profitable to fix wages, and doing so is good for worker welfare and resource allocation in equilibrium.