The International Monetary Fund (IMF), the financial agency of the United Nations, has this week released a research paper that seeks to answer questions about the impact of Artificial Intelligence (AI) on the future of work. And whilst the hysteria and fear mongering surrounding AI has continued strong into the New Year, the IMF’s report offers balanced - and substantiated - insight into the impact of the advancing technology on labor markets and incomes.
The report aims to distinguish between work that has high/low exposure to AI (the extent to which jobs will be impacted by Artificial Intelligence) and work that has high/low complementarity with AI (the extent to which jobs will benefit from Artificial Intelligence). This analysis then forms the basis for understanding how the technology - which has piqued the interest of organizations, individuals and governments around the world since the launch of OpenAI’s ChatGPT - will disrupt the global economy.
The key things to note are that advanced economies are at greater risk, but are also better positioned, to exploit AI, due to their high prevalence of cognitive-task oriented jobs (highly exposed to the introduction of AI). Whereas emerging markets and developing economies, which often still rely on manual labor and traditional industries, will likely face fewer AI-infused disruptions. But as the IMF points out:
However, these economies may also miss out on early AI-driven productivity gains, given their lack of infrastructure and a skilled workforce. Over time, the AI divide could exacerbate existing economic disparities, with advanced economies harnessing AI for competitive advantage while emerging market and developing economies grapple with integrating AI into their growth models.
And this provides a good basis for the overarching theme of the research. The IMF essentially highlights that those at the top of the income index and those with jobs that have high exposure, but also high complementarity to and with AI, will benefit most. That’s not to say that the IMF doesn’t highlight the unpredictability of how this will play out - it does - but it seems those in jobs with high exposure/high complementarity (doctors, lawyers, judges) living in advanced economies (the US, the UK), will be the winners with the advancement of AI.
It notes that in the average advanced economy, 27 percent of employment is in high-exposure, high-complementarity occupations, whilst 33 percent is in high-exposure, low-complementarity jobs. In comparison, emerging market economies have corresponding shares of 16 and 24 percent, respectively, and low-income countries have shares of 8 and 18 percent, respectively.
But it adds:
These findings suggest that advanced economies may be more susceptible to labor market shifts from AI adoption, materializing over a shorter time horizon than in emerging market economies and low- income countries. Given their high shares of employment in both low- and high-complementarity occupations, advanced economies may experience a more polarized effect from the structural transformation brought about by AI.
On one hand, they face a greater risk of labor displacement and harmful income developments for workers in the high-exposure and low-complementarity occupations. On the other hand, they are better positioned to take advantage early of the emerging AI growth opportunities as a result of their larger amount of employment in high-exposure and high-complementarity jobs. The net employment impact will depend on countries’ ability to innovate, adopt, and adapt to AI.
Simply put, governments and industries in advanced economies will need to quickly think through how they plan to best take advantage of AI if they want to spread its benefit as widely as possible. Whilst the report notes that in low-income countries, AI also does have the potential to mirror the adoption of mobile technology and lead to large marginal benefits. It adds that with appropriate digital infrastructure in place, AI could present an opportunity for developing economies to address skill shortages in areas such as health and education.
Income and wealth inequality
As has been highlighted on diginomica previously, AI is likely to disrupt economies differently than compared to previous waves of automation and the introduction of new technologies, given that displacement risks extend to higher-wage earners - not just “middle-skilled workers”. Much like the cross-country assessment of AI, the IMF found that high complementarity, higher-wage earners can expect a “more-than-proportional increase” in their labor income, leading to an increase in labor-income inequality.
And whilst the IMF notes that enhanced economic activity and labor demand spurred by AI could offset the negative consequences of labor displacement.
However, the potential for AI to complement jobs is positively correlated with income levels. As such, the trajectory of labor income inequality hinges on how well AI complements tasks undertaken by high-income professionals.
Model simulations suggest that with strong complementarity, high-wage earners might experience a disproportionate increase in their earnings, thereby intensifying labor income inequality. This channel would amplify the increase in income and wealth inequality resulting from enhanced capital returns, which typically accrue to higher-earning people.
It’s worth reiterating the above point - that high-income workers hold a large share of assets, and as such, they will benefit more from the rise in capital returns. The IMF notes that in all modeling scenarios, independent of labor income, the total income of top earners increases because of capital income gains.
However, that being said, the IMF research does note that the gains in productivity, if strong, could result in high growth and higher incomes for most workers. Owing to capital deepening and a productivity surge, AI adoption should boost total income. It notes:
If AI strongly complements human labor in certain occupations and the productivity gains are sufficiently large, higher growth and labor demand could more than compensate for the partial replacement of labor tasks by AI, and incomes could increase along most of the income distribution.
Interestingly, the research also finds that women and highly educated workers are consistently more exposed to, but are also more likely to benefit from, AI. Seemingly mirroring the impact on advanced economies, the IMF finds that because women have a strong presence in the services sectors, and highly educated workers are typically employed in cognitive-intensive occupations, these are the groups that stand to gain the most from AI’s integration (if adopted in a way that doesn’t displace them).
On this point, the IMF report notes and warns:
The potential implications of AI demand a proactive approach from policymakers geared toward maintaining social cohesion. While long-term productivity gains from AI are likely, during the transition, job displacement and changes in income distribution could have substantial political economic implications. History shows that economic pressures can lead to social unrest and demands for political change. Ensuring social cohesion is paramount.
Policies must promote the equitable and ethical integration of AI and train the next generation of workers in these new technologies; they must also protect and help retrain workers currently at risk from disruptions.
The cross-border nature of AI amplifies its ethical and data security challenges and calls for international cooperation to ensure responsible use, as recently laid out in the Bletchley Declaration, signed by 28 countries and the EU. Countries have varying capacity to address these issues, which highlights the need for harmonized global principles and local legislation.
It’s in these final points that my main concerns lie with the advancement of Artificial Intelligence. If the past two decades have shown us anything, it’s that those that already hold assets and capital are the ones that benefit most from data-driven technologies. This increase in power and wealth for the top few percent, which is only accelerating, should be a worry and priority for policymakers for how they think about the cohesiveness of our societies. If the introduction of new tools is only going to benefit those that are already wealthy and already skilled, then that leaves economies exposed to the possibility of discontent. I’ve heard few examples of how the benefits of AI can be distributed more fairly across our societies, which should be a priority for governments.