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

Question

In an effort to stop the migration of many 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’ cost of capital and high tech equipment in their production processes. On the evening of the vote, local union officials voiced serious objections to this statute. Outline the basis of the argument most likely used by union officials. As a representative for one of the auto-makers, how would you counter the union officials’ argument?

Explanation / Answer

Giving tax credits to manufacturers will reduce the price of capital and make it relatively cheaper than labor. This means that in order to reduce costs, firm will use more capital. In other words, they will substitute labor with capital. This will reduce the demand for labor, with supply remaining the same this will create the problem of unemployment. Therefore, unions are against this move.

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