Economic Stimulus at the Expense of Routine-Task Jobs

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1 Economic Stimulus at the Expense of Routine-Task Jobs Selale Tuzel (USC) Miao Ben Zhang (USC) Home February 23, 2017

2 Motivation Much of the investment tax policy emphasizes job creation: Our bill aimed to help small businesses invest, grow, and create jobs by providing needed tax relief and certainty.... In light of the positive effects these provisions would have on small businesses, on jobs, and on our economy, I urge my colleagues to support the tax relief package. - Senator Susan Collins (Congressional Record, 2015)

3 Motivation Much of the investment tax policy emphasizes job creation: Our bill aimed to help small businesses invest, grow, and create jobs by providing needed tax relief and certainty.... In light of the positive effects these provisions would have on small businesses, on jobs, and on our economy, I urge my colleagues to support the tax relief package. - Senator Susan Collins (Congressional Record, 2015) Most of previous studies focus on implications for investment. Cummins, Hassett and Hubbard (1994); Goolsbee (1998); House and Shapiro (2008); Edgerton (2010); Zwick and Mahon (2017), etc.

4 Motivation Much of the investment tax policy emphasizes job creation: Our bill aimed to help small businesses invest, grow, and create jobs by providing needed tax relief and certainty.... In light of the positive effects these provisions would have on small businesses, on jobs, and on our economy, I urge my colleagues to support the tax relief package. - Senator Susan Collins (Congressional Record, 2015) Most of previous studies focus on implications for investment. Cummins, Hassett and Hubbard (1994); Goolsbee (1998); House and Shapiro (2008); Edgerton (2010); Zwick and Mahon (2017), etc. Effect of such policies on labor outcomes is not well explored. Ohrn (2016); Gaggl and Wright (2016); Zwick and Mahon (2017).

5 Motivation Routine-task labor: Workers performing procedural and rule-based tasks. Tax preparers Tax preparation software Automobile assemblers Robotic arms Middle-skill & susceptible to technological displacement

6 Motivation Routine-task labor: Workers performing procedural and rule-based tasks. Tax preparers Tax preparation software Automobile assemblers Robotic arms Middle-skill & susceptible to technological displacement Literature: Routine-task jobs decline while other jobs thrive. Autor, Levy, and Murnane (2003); Autor, Katz, and Kearney (2006); Goos and Manning (2007); Autor and Dorn (2013); Jaimovich and Siu (2014); etc.

7 Motivation Routine-task labor: Workers performing procedural and rule-based tasks. Tax preparers Tax preparation software Automobile assemblers Robotic arms Middle-skill & susceptible to technological displacement Literature: Routine-task jobs decline while other jobs thrive. Autor, Levy, and Murnane (2003); Autor, Katz, and Kearney (2006); Goos and Manning (2007); Autor and Dorn (2013); Jaimovich and Siu (2014); etc. This paper: Did pro-growth tax policy on investment accelerate the divergence between routine-task jobs and other jobs?

8 This paper We study the effect of Section 179, a major tax incentive for investment in equipment and software.

9 This paper We study the effect of Section 179, a major tax incentive for investment in equipment and software. Explore variations in state adoption of the incentive (treatment vs control) Identify firms that are eligible for the incentive AAAAAAA (use ineligible firms for placebo tests) Examine firms computer investments Study the effects on routine and nonroutine jobs separately, in addition to total employment

10 Preview of results When states expand incentive for equipment investment, eligible firms: purchase more computers, hire more nonroutine-task labor, start reducing their routine-task labor, largest reductions happen next year, reduce routine-task labor next year more if they invested more and hired more nonroutine-task labor following the incentive. No effect for ineligible firms.

11 Contribution to literature Economic policy: Heterogeneous worker skills are important for policy outcomes.

12 Contribution to literature Economic policy: Heterogeneous worker skills are important for policy outcomes. Labor economics: First time to directly test and confirm that routine-task workers are substitutable by computers at the micro-level.

13 How does Section 179 work? An example A small firm is considering a $250,000 investment in computers: Year Total State without Section 179 Deductions (000s) State tax benefit (τ = 6.08%) PV of tax benefit (r = 10%) State with Section 179 Deductions (000s) State tax benefit (τ = 6.08%) PV of tax benefit (r = 10%) 15.2 Differences in PV of tax benefits = $2, 272

14 How does Section 179 work? An example A small firm is considering a $250,000 investment in computers: Year Total State without Section 179 Deductions (000s) State tax benefit (τ = 6.08%) PV of tax benefit (r = 10%) State with Section 179 Deductions (000s) State tax benefit (τ = 6.08%) PV of tax benefit (r = 10%) 15.2 Differences in PV of tax benefits = $2, 272 Potential amplification channels: - Financial constraints: Differences in first year funding need = $12,160 - Fixed adjustment costs: Investment may rise sharply when policy induces a firm across its adjustment threshold

15 Who benefits from Section 179? Section 179 s features for targeting small business: Deduction Limits and Phase-out Thresholds Cumulative Tax Benefit For Investments $2,272 Deduction Limit ($250,000) Phase Out Threshold ($800,000) PO + Limit ($1,050,000)

16 Who benefits from Section 179? 9.1 Marginal Tax Benefit Per $1K Investment Phase Out Threshold ($800,000) 0 0Deduction Limit ($250,000) 1500 PO + Limit ($1,050,000)

17 Changes in federal Section 179 limits and thresholds Deduction Limit of Federal Section 179 Increases over Thousands 2, Section 179 Limits Section 179 Phase Out Thresholds ,000 Investment Limits , , , ,000 24, Year - Firms in adopting states receive additional incentives (tax deduction) for equipment investment

18 Changes in federal Section 179 limits and thresholds Deduction Limit of Federal Section 179 Increases over Thousands 2, Section 179 Limits Section 179 Phase Out Thresholds 2,000, ,000 Investment Limits , , Year - Phaseout thresholds help to identify eligible firms

19 Who is effected by limit changes? 9.1 Marginal Tax Benefit Per $1K Investment OLD PO ($800,000) 0 Phase Out Threshold ($2,000,000) 0 Deduction Limit OLD PO + Old Limit ($500,000) ($1,050,000) Old Limit ($250,000) 9.1

20 Who is affected by limit changes? 9.1 Marginal Tax Benefit Per $1K Investment Eligible Firms: E(I)<= min(old PO + Old Limit, PO)

State Section 179 limits State adoption of Section 179 is quite stable State adoption in 2003 State adoption in 2014 22 states adopt in every year 10 states never

21 State Section 179 limits State adoption of Section 179 is quite stable State adoption in 2003 State adoption in states adopt in every year 10 states never adopt 12 states adopt in some years State limit changes: state-year increases state-year unchanged - 6 state-year decreases Correlation with Other State Changes

22 Data Computer investments of establishments: Computer Intelligence Technology Database (CiTDB) - Number of computers and servers for establishments million establishments before 2010 and 3.2 million after.

23 Data Computer investments of establishments: Computer Intelligence Technology Database (CiTDB) - Number of computers and servers for establishments million establishments before 2010 and 3.2 million after. Employment and occupational composition of establishments: Microdata of Occupational Employment Statistics from BLS - Employment at occupation-establishment level million establishments, surveyed once every three years; 62% of total employment

24 Data Computer investments of establishments: Computer Intelligence Technology Database (CiTDB) - Number of computers and servers for establishments million establishments before 2010 and 3.2 million after. Employment and occupational composition of establishments: Microdata of Occupational Employment Statistics from BLS - Employment at occupation-establishment level million establishments, surveyed once every three years; 62% of total employment Characteristics of occupations: Dictionary of Occupational Titles (DOT) Hand-collected data on State 179 limits from CCH state tax handbook, supplemented by state websites,...

25 Classifying routine-task labor 1 Each occupation s intensity in three groups of tasks (800+ occupations) - Routine task: examples: clerks and assemblers - Nonroutine abstract task: examples: managers and professionals - Nonroutine manual task: examples: janitors and electrical repairers

26 Classifying routine-task labor 1 Each occupation s intensity in three groups of tasks (800+ occupations) - Routine task: examples: clerks and assemblers - Nonroutine abstract task: examples: managers and professionals - Nonroutine manual task: examples: janitors and electrical repairers 2 Assign a routine-task intensity score (RTI ) to each occupation (Autor and Dorn (2013)): RTI k = ln(t Routine k ) ln(tk Abstract ) ln(tk Manual )

27 Classifying routine-task labor 1 Each occupation s intensity in three groups of tasks (800+ occupations) - Routine task: examples: clerks and assemblers - Nonroutine abstract task: examples: managers and professionals - Nonroutine manual task: examples: janitors and electrical repairers 2 Assign a routine-task intensity score (RTI ) to each occupation (Autor and Dorn (2013)): RTI k = ln(t Routine k ) ln(tk Abstract ) ln(tk Manual ) 3 Each year, rank all workers by RTI and define the top quintile of workers as Routine-Task Labor.

28 Firm-level measures Employment measures: L R,j,t = emp j,k,t 1 k L N,j,t =L tot,j,t L R,j,t L i,t,t+3 = L i,t+3 L i,t [ 0.5(L i,t+3 + L i,t ) RTI k > RTI P80 t Changes in share of routine-task labor (RShare) is measured as: ] RShare j,t = L R,j,t L tot,j,t, RShare t,t+3 = RShare t+3 RShare t Computer investment: PC t,t+1 = PC t+1 PC t 0.5(PC t+1 + PC t )

29 Firm-level measures Employment measures: L R,j,t = emp j,k,t 1 k L N,j,t =L tot,j,t L R,j,t L i,t,t+3 = L i,t+3 L i,t [ 0.5(L i,t+3 + L i,t ) RTI k > RTI P80 t Changes in share of routine-task labor (RShare) is measured as: ] RShare j,t = L R,j,t L tot,j,t, RShare t,t+3 = RShare t+3 RShare t Computer investment: Eligibility: PC t,t+1 = PC t+1 PC t 0.5(PC t+1 + PC t ) Inv equip f,t < min(limit t 1 + PO t 1, PO t ) where Inv equip f,t = Emp f,t ( Inv equip ) Emp i,t 3 t

30 Summary statistics Limit179 > 0 Limit179 0 Mean S.D. Median Mean S.D. Median OES Sample L tot L R L N RShare(%) Obs. 178, ,306 CiTDB Sample L tot PC Obs. 298, ,389 Sample period is

31 PC investment and changes in state Section 179 limit Regression specification: PC f,s,t+1 = b 1 Limit s,t + b 2 X s,t + b 3 PC f,s,t + FE EmpBin Ind Year + ɛ e,s,t+1 b 1 > 0 - FE EmpBin Ind Year : matching establishments based on a full interaction of 7 employment bins: (1, 4), (5, 9), (10, 14), (15, 24), (25, 49), (50, 99), (100, 199), and above 200, NAICS 4-digit, and year

32 Result 1a: Firms buy more computers after limit increases Dependent Variable = PC All (obs=384k) Eligible (obs=282k) Ineligible (obs=102k) State Changes (1) (2) (3) (4) (5) (6) Limit (2.25) (2.63) (2.53) (2.88) (3.56) (3.98) Hiring Credits (0.28) (0.30) (0.34) Bonus Adoption (0.29) (0.38) (0.58) RShare (28.38) (27.01) (51.70) Democratic (0.48) (0.58) (0.61) Credit Score (0.10) (0.11) (0.22) Unemployment (0.14) (0.14) (0.24) Budget Surplus (0.03) (0.03) (0.06) Income Tax (0.12) (0.11) (0.24) Corp. Tax (0.05) (0.05) (0.16) GSP (0.06) (0.07) (0.08) Past Trend (0.00) (0.00) (0.00) (0.00) (0.01) (0.01)

33 Result 1b: Firms increase computer investments quickly Contemporaneous response or delayed response? All Establishments Eligible Establishments Ineligible Establishments State Changes (1) (2) (3) (4) (5) (6) Limit179 [t = 2] (2.74) (3.02) (2.45) (2.73) (6.66) (7.77) Limit179 [t = 1] (2.69) (2.92) (2.51) (2.76) (4.25) (4.43) Limit179 [t = 0] (2.24) (2.65) (2.59) (2.96) (3.59) (4.14) State Controls N Y N Y N Y

34 Result 2: Labor response is heterogeneous Changes from t to t + 3 Routine Emp NonRoutine Emp Routine Share Total Emp (1) (2) (3) (4) Limit179 [t = 1] (6.36) (2.76) (1.20) (2.09) Limit179 [t = 0] (6.85) (1.63) (1.03) (1.56) Limit179 [t = 1] (7.17) (2.56) (1.07) (2.55) Limit179 [t = 2] (4.17) (3.04) (0.67) (2.11) Past Trend (0.00) (0.01) (0.00) (0.01) Observations 317, , , ,099 Adjusted R

35 Result 2a: Firms increase nonroutine-task labor quickly Emp NR [t, t+3] Response to Current Changes in State Section 179 Limits All Eligible Ineligible (1) (2) (3) (4) (5) (6) Limit179 [t = 0] (1.42) (1.69) (1.79) (2.07) (3.15) (3.31) State Controls N Y N Y N Y Observations 393, , , , , ,864 Adjusted R

36 Result 2b: Firms reduce most routine-task labor with a delay Emp R [t, t+3] Panel A: Response to Lagged Changes All Eligible [t = 1] Ineligible [t = 1] (1) (2) (3) (4) (5) (6) Limit179 [t = 1] (7.42) (7.15) (8.31) (8.50) (8.64) (7.47) State Controls N Y N Y N Y Adjusted R Panel B: Response to Current Changes All Eligible Ineligible (1) (2) (3) (4) (5) (6) Limit (6.89) (6.88) (6.95) (6.98) (8.47) (8.63) State Controls N Y N Y N Y Adjusted R

37 Result 2c: Routine-task employment share declines RShare [t, t+3] Panel A: Response to Lagged Changes All Eligible [t=-1] Ineligible [t=-1] (1) (2) (3) (4) (5) (6) Limit179 [t=-1] (1.23) (1.16) (1.43) (1.42) (1.49) (1.38) State Controls N Y N Y N Y Adjusted R Panel B: Response to Current Changes All Establishments Eligible Establishments Ineligible Establishments (1) (2) (3) (4) (5) (6) Limit (0.96) (0.93) (1.09) (1.03) (1.06) (1.13) State Controls N Y N Y N Y Adjusted R

38 Result 2d: No significant effect on firms total employment Emp [t, t+3] Panel A: Response to Lagged Changes in State Section 179 Limits All Eligible [t=-1] Ineligible [t=-1] (1) (2) (3) (4) (5) (6) Limit179 [t=-1] (2.10) (1.90) (2.14) (2.06) (3.23) (2.78) State Controls N Y N Y N Y Adjusted R Panel B: Response to Current Changes in State Section 179 Limits All Eligible Ineligible (1) (2) (3) (4) (5) (6) Limit (1.63) (1.74) (1.79) (1.89) (2.53) (2.72) State Controls N Y N Y N Y Adjusted R

39 Robustness: Examining responses of wage bills All Establishments Eligible Establishments Ineligible Establishments (1) (2) (3) (4) (5) (6) Panel A: Responses of Wage Bills for Routine-Task Labor Limit (7.69) (7.51) (7.78) (7.67) (9.11) (9.15) Limit179 [t-1] (8.42) (7.82) (9.23) (9.20) (9.47) (7.71) Panel B: Responses of Wage Bills for Nonroutine-Task Labor Limit (2.20) (2.37) (2.56) (2.79) (3.78) (3.95) Limit179 [t-1] (3.51) (3.02) (3.87) (3.51) (4.66) (4.06) Panel C: Responses of Routine-Task Wage Bill Share Limit (0.86) (0.83) (0.99) (0.94) (0.94) (1.00) Limit179 [t-1] (1.04) (0.99) (1.21) (1.20) (1.24) (1.17) Panel D: Responses of Total Wage Bills Limit (2.56) (2.50) (2.90) (2.83) (3.34) (3.50) Limit179 [t-1] (3.50) (3.08) (3.48) (3.29) (4.51) (3.64) State Controls N Y N Y N Y

40 Robustness: Did computers replace routine-task labor? Are firms that purchased computers and increased nonroutine task labor following a state limit increase more likely to reduce routine-task labor later? Emp R [t, t+3] Cond. on PC t 1,t Cond. on Emp NR t 3,t Cond. on Emp R t 3,t All Eligible All Eligible All Eligible (1) (2) (3) (4) (5) (6) Limit179 [t=-1] (16.89) (22.54) (6.65) (7.80) (7.12) (8.42) Cond. Var (0.01) (0.02) (0.01) (0.01) (0.00) (0.00) Limit179 [t=-1] Cond. Var. (0.38) (0.14) (0.07) (0.08) (0.04) (0.05) State Controls Y Y Y Y Y Y Observations 41,246 16, , , , ,790 Adjusted R

41 Conclusion Study effect of investment tax policy on labor outcomes. Find that among eligible firms, investment incentives boost PC investment but lead to heterogeneous labor outcomes. Nonroutine-task jobs are created and routine-task jobs are destructed. Investment tax incentives may have unintended consequences...

42 Trump s Tax Cuts and Jobs Act of 2018 Source:

43 Changes in state Section 179 limits Changes in State Section 179 Limit ($thousands) (1) (2) (3) (4) (5) Hiring Credits (3.85) (3.83) Bonus Adoption (19.73) (20.07) Budget Surplus (1.06) (1.14) GSP (0.99) (0.97) Unemployment (5.51) (5.37) RShare (4.20) (4.29) Income Tax (4.78) (4.31) Corp. Tax (3.68) (3.89) Democratic Dummy (11.03) (11.02) Observations Adjusted R Go Back

Labor-Technology Substitution: Implications for Asset Pricing. Miao Ben Zhang University of Southern California

Labor-Technology Substitution: Implications for Asset Pricing Miao Ben Zhang University of Southern California Background Routine-task labor: workers performing procedural and rule-based tasks. Tax preparers