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

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  • Austan Goolsbee

Abstract

This paper looks at the impact of investment tax subsidies on the labor market for capital goods workers using data from the 1979-88 Current Population Survey. The results show that investment subsidies drive up the wages of workers who produce capital goods relative to other manufacturing workers. A 10% investment tax credit, for example, raises the relative wage of capital goods workers by 2.5%-3.0% on average and up to around 10%, depending on the workers' characteristics. The evidence is consistent with an existing literature on the cyclicality of manufacturing wages as is the evidence that the wage increases are largest for workers with low education, workers with less tenure, and workers in non-management occupations. The evidence is also consistent with the literature on rent-sharing in profitable industries as are the results indicating the importance of unions for the wage increases. Either way, the evidence of rising wages is an important part of the upward sloping supply of capital goods identified in previous work and means that much of the benefit of investment subsidies is passed to capital suppliers and their employees.

Suggested Citation

  • Austan Goolsbee, 1998. "Investment Subsidies and Wages in Capital Goods Industries: To the Workers Go the Spoils?," NBER Working Papers 6526, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6526
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    File URL: http://www.nber.org/papers/w6526.pdf
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    References listed on IDEAS

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    1. Hildreth, Andrew K G & Oswald, Andrew J, 1997. "Rent-Sharing and Wages: Evidence from Company and Establishment Panels," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 318-337, April.
    2. Mussa, Michael L, 1977. "External and Internal Adjustment Costs and the Theory of Aggregate and Firm Investment," Economica, London School of Economics and Political Science, vol. 44(174), pages 163-178, May.
    3. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 729-752.
    4. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
    5. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-293, March.
    6. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-855, December.
    7. Feldstein, Martin S, 1977. "The Surprising Incidence of a Tax on Pure Rent: A New Answer to an Old Question," Journal of Political Economy, University of Chicago Press, vol. 85(2), pages 349-360, April.
    8. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1996. "Wages, Profits, and Rent-Sharing," The Quarterly Journal of Economics, Oxford University Press, vol. 111(1), pages 227-251.
    9. Austan Goolsbee, 1998. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 121-148.
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    Cited by:

    1. Goolsbee, Austan, 2000. "The Importance of Measurement Error in the Cost of Capital," National Tax Journal, National Tax Association, vol. 53(n. 2), pages 215-28, June.
    2. Mariacristina Piva & Enrico Santarelli & Marco Vivarelli, 2004. "Technological and Organizational Changes as Determinants of the Skill Bias: Evidence from a Panel of Italian Firms," Papers on Entrepreneurship, Growth and Public Policy 2004-03, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
    3. Goolsbee, Austan, 2003. "Investment Subsidies and Wages in Capital Goods Industries: To the Workers Go the Spoils?," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(1), pages 153-165, March.

    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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