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In an effort to stop the migration of many of the automobile manufacturing facilities from the...

In an effort to stop the migration of many of the automobile manufacturing facilities from the Detroit area, Detroit’s city council is considering passing a statute that would give investment tax credits to auto manufacturers. Effectively, this would reduce auto manufacturers’ costs of using capital and high-tech equipment in their production processes. What is the likely impact of this statute on the number, skill level, and wages of workers that this automaker hires and explain why?

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Answer #1

The investment tax credit will reduce cost of capital and high-tech equipment, effectively decreasing production cost. Therefore, auto firm will increase production and output, which will increase the demand for labor. Higher demand for labor will shift the labor demand curve, which will increase wage rate and employment, ceteris paribus.

Eventually, working in a high-tech working environment will increase the skill level of workers due to higher productivity.

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