Investment Subsidies and Wages in Capital Goods Industries: To the Workers Go the Spoils?

Abstract

This paper looks at the impact of investment tax subsidies on the labor market for capital goods workers. Using data during a decade with considerable variation in the tax cost of capital (1979-1988), the results show that tax subsidies to investment drive up capital goods workers' wages. A 10 percent investment tax credit, for example, raises the relative wages of such workers, on average, by 2.5 percent - 3.0 percent relative to comparable manufacturing workers in other sectors and more for certain types of workers. Rising wages make up an important part of the rising supply curve for capital goods and reflects imperfect short-run mobility of production workers across sectors.

JEL Classification: J31