How AI can change the labor market, finances, and government budgets

In their analytical essay, they examine a hypothetical chain of events in which the development of AI could gradually trigger structural changes in the labor market, consumption, the financial system, and government budgets.

The beginning of a potential chain reaction

This scenario is based on the idea that a new wave of automation could primarily affect intellectual labor. While previous technological revolutions mainly replaced physical work, modern AI is capable of performing tasks that were long considered exclusively human: information analysis, decision-making, communication, and content creation.

As such systems become cheaper and more accessible, businesses are incentivized to integrate them into daily operations. In the hypothetical example provided by analysts, an AI agent can perform the tasks of a highly paid specialist for a cost of just a few hundred dollars per month.

For companies, this means the opportunity to significantly reduce personnel costs.

If such solutions are adopted on a large scale, an economic chain reaction could occur: companies cut labor costs, household incomes fall, and consumption declines accordingly. In response, businesses may accelerate automation, further intensifying this process.

How labor market changes affect consumption

However, the initial changes may manifest not in layoff statistics, but in worker behavior.

Even while retaining their jobs, employees begin to be more cautious with their spending. Fearing potential job automation, they save more and spend less. Meanwhile, labor productivity may rise as employees actively use AI tools and work more intensively to secure their positions.

Such behavioral changes can slow down economic activity even before mass layoffs occur.

Data lags also play a role. High-income individuals often have savings that allow them to maintain their standard of living for some time. Therefore, changes in consumer behavior may become apparent before they show up in official statistics.

Why layoffs among high-income earners could be particularly sensitive

In traditional economic downturns, job cuts are distributed relatively evenly. However, in the described scenario, the main blow could fall on high-paid office professionals.

Although this group represents a smaller share of the workforce, it accounts for a significant portion of consumer demand. According to economists, the top 10% of households by income account for more than half of all consumer spending in the US, while the top 20% account for about two-thirds.

Therefore, even a relatively small reduction in employment among high-paid workers could significantly impact the economy. So-called discretionary spending—expenditures on goods and services that are not essential—could decline particularly sharply.

Potential pressure on the financial system

If declining incomes begin to affect consumption, the next stage of the potential chain reaction could impact the financial system.

Many financial products—mortgages, consumer loans, and investment instruments—are built on the assumption of stable household incomes. If technological changes make incomes less predictable, these expectations may prove too optimistic.

The real estate market could be especially sensitive. In the US, the total volume of mortgage loans is approximately $13 trillion, and a significant portion of these obligations is based on the expectation of stable borrower incomes. If incomes decline, financial institutions begin to reassess risks, which could lead to tighter lending conditions and reduced activity in the real estate market.

Risks in the private credit market

Analysts also pay special attention to the private credit market, which has grown actively in recent years. Over the last decade, its volume has more than doubled, reaching several trillion dollars.

A significant portion of this capital was directed toward technology companies, including leveraged buyouts of software companies. Such deals were often based on expectations of stable revenue growth.

However, rapid technological changes could call these assumptions into question. If new AI-based solutions begin to quickly displace traditional software products, companies previously considered stable sources of income may face declining demand.

In this case, debt obligations backed by the future incomes of such companies become riskier, and the revaluation of such assets could create tension in capital markets.

Why traditional policy measures may work less effectively

In past crises, governments and central banks used proven tools—lowering interest rates, economic stimulus programs, and quantitative easing. These measures helped restore demand and stimulate investment.

However, in the scenario considered, the problem may be more structural. If an economic downturn is linked to technological labor displacement, lowering interest rates does not necessarily lead to increased employment.

Even with cheap credit, companies may prefer to invest in automation rather than expanding their workforce.

A new challenge for public finances

Another possible consequence relates to government budgets. In most developed countries, a significant portion of budget revenue is generated through labor taxes—income taxes and social contributions.

If the share of wages in the economy begins to decline, the tax base automatically shrinks.

At the same time, government spending during periods of economic hardship typically increases: social benefits, employment support programs, and other forms of public assistance grow. As a result, the government may need more funds precisely when tax revenues are decreasing.

Political ideas and new models of income distribution

Against this backdrop, proposals for new economic policy mechanisms are already emerging in the US and other countries.

These include programs for direct financial support for workers whose professions have been displaced by technology, as well as potential taxes on artificial intelligence infrastructure.

Some initiatives suggest that a portion of the revenue from using AI infrastructure could be distributed among the population—on the principle of technological dividends. However, such ideas spark serious political debate: supporters consider them necessary for social stability, while critics fear negative impacts on innovation and investment.

An economy in a world where intelligence is no longer scarce

The key question in this discussion is what will happen if human intelligence ceases to be a scarce resource.

Historically, the ability to analyze information, make decisions, and generate ideas has been one of the primary factors of production. Many economic institutions—the labor market, the education system, tax policy, and financial markets—were built on this assumption.

If machine intelligence becomes scalable and relatively inexpensive, this historical "intelligence premium" may gradually decline. In such a case, the economy will need to rethink many existing models.

The future remains open

The authors of the analysis emphasize that the described scenario is not a precise forecast of the future. Many of these events may not materialize or may manifest much more mildly.

Today, markets remain strong, the economy continues to grow, and artificial intelligence is only beginning to be actively integrated into business.

Nevertheless, the speed of technological change is prompting investors, companies, and governments to consider how resilient existing economic models will be in the long term.

The economy is capable of adapting to new conditions, but this process takes time. The main question is whether economic and political institutions will be able to change as quickly as the technology itself evolves.