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

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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.

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