Tax policy and local labor market behavior

Author / Creator

Garrett, Daniel G., author

Available as

Online

Summary

Since 2002, the US government has encouraged business investment using accelerated depreciation policies that significantly reduce investment costs. We provide the first in-depth analysis of this s...

Since 2002, the US government has encouraged business investment using accelerated depreciation policies that significantly reduce investment costs. We provide the first in-depth analysis of this stimulus on employment and earnings. Our local labor markets approach exploits cross-industry differences in policy generosity interacted with county-level variation in industry concentration. Places that experience larger decreases in investment costs see a level increase in employment that implies a $53,000 cost-per-job. We find no positive effects on average earnings. In contrast, we document a persistent growth in capital. These results imply a capital-labor substitution elasticity that grows over time and can exceed unity.

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