Institutional Context and the Employment Effects of Artificial Intelligence in European SMEs

Using novel data from the Survey on Access to Finance of Enterprises, whose wave conducted in the last quarter of 2025 introduced a dedicated module on AI adoption, and an Inverse Probability Weighted Regression Adjustment approach, we assess the conditional effect of artificial intelligence (AI) use by Small and Medium-sized Enterprises across twelve EU countries on the likelihood of employment growth. We find that AI adoption is associated with a positive conditional effect on the probability of employment growth, with no significant effect on the likelihood of employment decline, consistent with complementarity dominating substitution at the current stage of diffusionin Europe. Such employment gains scale with the depth of AI integration, and firms reporting significant AI use exhibit conditional effects twice as large as infrequent users, suggesting that the returns to AI depend on operational embeddedness rather than adoption per se. The estimated conditional effects are also strongly heterogeneous. Positive responses are concentrated among small and medium firms and in the services sector, while micro firms show no significant effect,and the construction sector is the only segment associated with an elevated risk of workforce contraction. Institutional context also matters decisively. Employment-enhancing effects are significantly larger in countries with stronger innovation ecosystems, more flexible labour markets, higher governance quality, and more decentralised political systems. These findings carry direct policy implications, promoting AI adoption without supporting deep integration, targeting micro enterprises, and accounting for national institutional capacity is unlikely to maximise the labour market gains from AI diffusion across Europe.