Generative Artificial Intelligence (AI) is not merely changing how people work but fundamentally reshaping the nature of work itself, ushering in a new era with evolving roles, disruptions, and emerging opportunities.

The ongoing impact on the labor market raises questions about the commercial success of AI applications, the creation of new jobs, and the extent to which generative AI can replace or augment various types of work. Despite uncertainties, a framework can help assess the multifaceted impact of AI.

The Automation of Decisions

Generative AI, beyond automating tasks, excels at analyzing vast datasets and recognizing patterns, acting as “prediction machines.” This ability allows organizations to make quicker, more cost-effective, and automated decisions, significantly altering the economy’s landscape.

This shift towards AI-driven decision-making has the potential to boost overall productivity in the U.S. economy, primarily dominated by information and knowledge work. The ability of AI to enhance decision-making processes accelerates the economy by increasing efficiency, impacting labor, and influencing investments.

The Measurement of Productivity

Productivity, a key economic metric, involves total factor productivity (TFP) and the contribution of labor composition and capital intensity. While recent years have seen slow TFP growth, generative AI’s potential to perform cognitive tasks previously reserved for human workers can be a catalyst for economic growth.

As the capabilities of generative AI systems expand, impacting a significant portion of the U.S. workforce, the potential benefits are substantial. Recent research suggests that Large Language Models (LLMs) could influence up to 80 percent of the U.S. workforce, with a Goldman Sachs report projecting a 7 percent increase in global GDP due to generative AI.

Channels of AI’s Impact

Generative AI enhances output efficiency, accelerates innovation, and contributes to technological progress, leading to increased labor demand. However, realizing these productivity gains requires time and adaptation across the economy.

AI’s impact on the labor market involves both disruption and potential augmentation. While concerns often revolve around displacement, the positive effects on labor demand through augmentation, capital deepening, and the creation of new tasks and industries should not be overlooked.

Improved AI systems, like advanced recommendation algorithms, can increase company returns and stimulate demand for workers. Investments in AI systems not only enhance worker productivity but also create new tasks and industries, further boosting labor demand.

Toward Economic Growth and Job Creation

Contrary to fears of a job apocalypse, the model suggests that AI systems enhancing labor productivity could positively impact labor demand. However, the net effect depends on the effectiveness of AI systems in not only displacing workers but also increasing demand through other channels.

While AI’s impact on the labor market is complex, addressing displacement challenges and ensuring skill adaptation are crucial for harnessing the potential of generative AI to drive significant economic growth and job creation.

By Impact Lab