Ai entry increases unemployment but affects job displacement differently
Displacement Is Endogenous: AI Workers in a Search-and-Matching Labor Market
Computers and Society
Summary
This work studies what happens when AI systems act like human workers in a job market. The researchers found that if AI jobs pay less than humans, more humans lose jobs mainly through layoffs. But when AI costs about the same, job losses happen mainly because firms hire fewer humans. The total number of workers displaced by AI depends on how much customers reduce buying when prices go up. Who gets hired changes with how companies screen applicants, but that doesn't change the overall number of jobs AI replaces.
What this means in practice
- •For labor market policymakers: Estimate how AI adoption affects unemployment and job loss sources to better design labor policies and safety nets.
- •For human resources teams: Adjust hiring and screening strategies based on AI competition and wage levels to optimize workforce composition.
Authors
Ibrahim Denis Fofanah
Abstract
We build a labor market in which AI systems enter as workers: they apply for jobs, pass screenings, get hired, and get dismissed, alongside humans. Firms post vacancies, workers search with friction, and product demand slopes downward. Across 30 seeded runs per configuration, AI entry at 70% of the human wage raises unemployment by 4.1 percentage points (95% CI 3.5 to 4.6) and leaves 12.2 fewer humans employed (CI 10.5 to 13.9). Layoffs dominate when AI is much cheaper than humans: the layoff margin accounts for 7.2 of the lost jobs and reduced hiring for 5.0, though most dismissed workers find work again. A wider price gap reduces displacement, because cheap AI makes firms expand: at price parity, with zero dismissals, the unemployment effect is largest at 9.2 points (CI 8.6 to 9.9), all of it through hiring. That parity result survives cutting AI applications from five per period to one. Demand elasticity decides how many workers AI displaces. Screening changes who gets hired and leaves the displacement total unchanged.