IIn 1983, Nobel Prize-winning economist Wassily Leontief concluded that after the introduction of the automobile, human labor would follow the same path as the horse – it would “first decrease and then disappear.”
Today, a new wave of doom and gloom surrounding “technological unemployment” has emerged as artificial intelligence, with its promise of business innovation, has moved to the forefront of the economic debate. Experts argue that we are now heading toward a “world without work” where machines produce all things and algorithms provide all services. Inferior humans play no role in this macroeconomic dystopia.
As we argue in Shocks, Crises, and False Alarms, predictions of technology-related job losses have a long history and, accordingly, a long list of failures. Fears about an aging workforce fluctuate with each new generation of technology. The threat of automation was once considered so dire that Bill Gates proposed a “robot tax” on companies that used robots instead of human labor to mitigate the impact on workers.
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And yet, despite the relentless technological advances of the past 80 years, which have repeatedly reshaped the labor market, the U.S. economy has created 120 million new jobs. In 2024, when unemployment remains historically low and real wages are rising, few will remember Gates’ idea of a robot tax.
The deflationary nature of technology
While this remains a popular narrative today, the false predictions of technological unemployment have not escaped all economists. More optimistic assessments suggest that AI will complement rather than replace workers, perhaps the least skilled. Others argue that replacing workers is harder than it seems because jobs are a collection of tasks and AI may not be able to do them all seamlessly.
Such arguments are important and have their roots in the microeconomics of labor. But the most compelling arguments against mass unemployment in the face of AI come from macroeconomics.
What is regularly overlooked is that technology is inherently a deflationary force. When it has a broad impact, technology drives down costs and prices, which drives up real consumer incomes and demand for new goods and services – and therefore new jobs. Such a rejuvenation of the labor market has been a matter of logic rather than luck, and has happened repeatedly.
Perhaps the most striking example of the deflationary impact of technology is the food sector. In the late 19th century, nearly half of all Americans worked on a farm and spent over 40 percent of their disposable income on food. Over the next 150 years, after several waves of innovation, only about 1 percent of all Americans worked on farms. Food budgets have since fallen to about 12 percent of income.
Lower prices lead to what economists call real income gains – consumers spend less and use the extra room in their budgets to increase consumption of often new goods and services, which ultimately leads to new jobs. While this process has always been associated with industry-specific job losses and thus microeconomic losses, it has also been a reliable path to new jobs and macroeconomic gains.
Given such a track record, it may seem surprising that doomsayers cling to dystopian narratives about technological unemployment. But it is easier to identify technology-related job losses, which are often concentrated and can happen quickly, than new job creation, which is usually scattered and occurs over a longer period of time.
“When technology has a broad impact, it reduces costs and prices, thereby increasing real consumer incomes and demand for new goods and services – and thus the creation of new jobs.
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— Philipp Carlsson-Szlezak, Global Chief Economist, Boston Consulting Group | Paul Swartz, Executive Director, Senior Economist, Boston Consulting Group
Will AI buck the trend?
If we closely examine the promises of AI at every step of the well-trodden path from new technology to new jobs, it seems unlikely that AI will end the story of labor market renewal and adaptation.
- Cost reduction. AI will likely be able to replace workers, particularly in service sectors where digital technologies have struggled to do so. While the speed and magnitude of this impact may be less than many expect today, a gradual and cumulatively significant reduction in costs (and increase in productivity) is a sure bet.
- Falling prices. If labor-saving technologies cannot be monopolized, they will continue to drive cost competition and deflation. These effects are not limited to food production, but are also seen in manufactured goods and now appear to be impacting the services sector as well. Policymakers may need to pay attention to and ensure competitive market structures to ensure that AI does not become a deflationary force in the economy.
- New demand. Real income gains often drive demand for goods and services that were barely known at the start of a new technological wave (hardly anyone would have predicted the arrival of social media marketers a few decades ago). However, this demand effect might not be enough if consumers retreat and save their income gains. However, a resulting savings surplus seems unlikely and directly contradicts historical data.
- New job. What if a machine or algorithm could always satisfy new demand? That humans would lose all comparative advantage seems extremely unlikely. The job-enhancing properties of AI are as credible as its job-eliminating ones. But even if Leontief’s words prove prescient and humans go “the way of the horse,” it would hardly be a macroeconomic dystopia. Instead, the overwhelming deflationary impulse would prepare the ground for unprecedented prosperity.
The impact of AI is seen, experienced and reported primarily from a microeconomic perspective, with even greater emphasis on the disruption and turmoil it brings. However, this should not be confused with the macroeconomic promises that AI brings. Mass technological unemployment remains an ahistorical and unlikely notion. While AI brings significant risks, widespread unemployment should not be at the top of our list of concerns.
A far more likely outcome is a gradual rise in productivity and prosperity, punctuated by the microeconomic pain that comes with any economic change. The world will not be without work, but it will function differently.
