February 20, 2019
The Washington Post had a rather confused piece that complained that investment encouraged by accelerated depreciation, which was a provision of the Trump tax cut (also the Obama stimulus), is “helping companies replace workers with machines.” This is reported as though it is some sort of scandal, when it is in fact precisely the point of this provision.
The stated goal of the Trump tax cut was to promote investment. This was their rationale for having the bulk of the tax cut go to businesses. Their argument was that a lower tax rate would provide businesses with more incentive to invest. More investment would lead to more rapid productivity growth. If workers got their share of gains in productivity, then they would benefit from having higher wages.
The key question in this story is whether the tax cut actually led to more investment. The evidence to date is that it has had at most a minimal effect on investment, with investment running slightly higher in 2018 than before the tax cut in 2017. There certainly has been no boom. There also is zero evidence that it led to any uptick in productivity growth, as productivity growth remained very slow through the year. So, by their own standard, the tax cut seems to be failing badly.
However, if we did see more investment and productivity growth, it would mean displacing workers. Higher productivity means more output can be produced with the same number of work hours, or alternatively, the same output can be produced with fewer work hours. (Fewer work hours doesn’t have to mean fewer workers. In other countries, much of the gain from higher productivity has been realized in the form of shorter work years. Workers have 5–6 weeks a year of vacation, paid family leave, paid sick days, and other forms of paid time off.)
The workers who are displaced by investment do not immediately benefit, but the workforce, as a whole, benefits when savings are passed on in lower prices. To take a dramatic example, the development of digital cameras displaced tens of thousands of workers at Kodak and Polaroid. These workers did not directly benefit from this increase in productivity, but other workers benefited from being able to buy low-cost digital cameras.
This is the way we would expect the productivity gains from higher investment to be shared with workers. Of course, this story depends both on prices falling in response to lower production costs (as opposed to profit shares increasing), so that the labor share of income stays constant. It also matters whether all wages rise more or less together or whether all the gains go to workers at the top.
Generally, the wage share has remained reasonably constant, with fluctuations over the business cycle. There was an increase in the profit share during the housing bubble years (some of this was illusory, as financial firms booked profits on loans that later went bad). The profit share increased much more during the Great Recession, as workers’ wages badly lagged productivity growth. In the last four years, as the labor market has tightened, the wage share has increased modestly but still has far to go to recover the ground lost in the last decade.
Workers did not share in the gains from productivity in the 1980s and 1990s because these gains went mostly to those at the top: CEOs, Wall Street-types, and highly paid professionals. In the last four years, workers at the middle and bottom have been getting their share of the gains from productivity, although since the rate of growth has been very slow (just over 1.0 percent annually), that has not meant very strong real wage growth.
If the labor market remains tight, it is reasonable to believe that gains in productivity growth will lead to higher wages, as promised in the tax cut induced investment story. The problem is that we aren’t seeing the promised investment and productivity growth. If we did, it would be a good thing for workers in the aggregate, even if some of the workers most directly affected, like the workers at Kodak and Polaroid, end up losing.
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