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Capital Investment and Labor Demand

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Capital Investment and Labor Demand

Written by:
Working Paper Number: CES-22-04

Abstract

CES_working_paper_series
Download Capital Investment and Labor Demand [PDF - > 1MB]

We study how bonus depreciation, a policy designed to lower the cost of capital, impacted investment and labor demand in the US manufacturing sector. Difference-in-differences estimates using restricted-use US Census Data on manufacturing establishments show that this policy increased both investment and employment, but did not lead to wage or productivity gains. Using a structural model, we show that the primary effect of the policy was to increase the use of all inputs by lowering overall costs of production. The policy further stimulated production employment due to the complementarity of production labor and capital. Supporting this conclusion, we find that investment is greater in plants with lower labor costs. Our results show that recent policies that incentivize capital investment do not lead manufacturing plants to replace workers with machines.

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Page Last Revised - April 21, 2023
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