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Capital Investment and Labor Demand

Authors:
E. Mark Curtis, Wake Forest University
Daniel G. Garrett, University of Pennsylvania
Eric Ohrn, Grinnell College
Kevin A. Roberts, Duke University
Juan Carlos Suárez Serrato, Duke University
Publication Date:
Jun 2022
Project Programs:
Future of Work

We study how tax policies that lower the cost of capital impact investment and labor demand. Difference-in-differences estimates using confidential Census Data on manufacturing establishments show that tax policies increased both investment and employment, but did not stimulate wage or productivity growth. Using a structural model, we find that the primary effect of the policy was to increase the use of all inputs by lowering costs of production and that capital and production workers are complementary inputs in modern manufacturing. Our results show that tax policies that incentivize capital investment do not lead manufacturing plants to replace workers with machines.

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