Artificial Intelligence and Technological Unemployment

How large is the impact of artificial intelligence (AI) on labor productivity and unemployment? This paper introduces a labor-search model of technological unemployment, conceptualizing the generative aspect of AI as a learning-by-using technology. AI capability improves through machine learning from workers and in turn enhances their labor productivity, but eventually displaces workers if wage renegotiation fails. Three distinct equilibria emerge: no AI, some AI with higher unemployment, or unbounded AI with sustained endogenous growth and little impact on employment. By calibrating to the U.S. data, our model predicts more than threefold improvements in productivity in some-AI steady state, alongside a long-run employment loss of 23%, with half this loss occurring over the initial five-year transition. Plausible change in parameter values could lead to global and local indeterminacy. The mechanism highlights the considerable uncertainty of AI's impacts in the presence of labor-market frictions. In the unbounded-AI equilibrium, technological unemployment would not occur. We further show that equilibria are inefficient despite adherence to the Hosios condition. By improving job-finding rate and labor productivity, the optimal subsidy to jobs facing the replacement risk of AI can generate a welfare gain from 26.6% in the short run to over 50% in the long run.