Businesses replacing staff with artificial intelligence may be undermining their own bottom line, with new research finding that unchecked AI-driven job cuts can leave employers collectively poorer than if they had held back.
The finding comes from a working paper titled The AI Layoff Trap, authored by Gerry Tsoukalas of Boston University’s Questrom School of Business and Brett Hemenway Falk of the University of Pennsylvania.
Contrary to the common perception that automation shifts gains from employees to owners, the researchers found that AI layoffs produce losses on both sides.
Once enough firms cut staff, the resulting drop in consumer spending drags every firm’s profit below what it would have earned had companies collectively restrained their job cuts.
The damage is greatest in crowded markets, the research found. The more rivals a firm has, the less of the economic fallout from its own layoffs it absorbs, and the stronger its temptation to keep cutting. But a monopolist, facing the consequences alone, automates at close to the efficient level.
Automation arms race
According to the researchers, the trap arises because the savings and the costs of a layoff land in different places.
“When a firm lays off workers to cut costs, those savings go straight to its bottom line, but the lost demand those workers represent gets spread thin across the entire economy,” Tsoukalas said in a statement.
“Every firm feels a tiny pinch, but no single firm feels the full hit of its own layoffs, so everyone keeps cutting – and that pull only grows stronger as AI gets cheaper and more capable. Competition creates an automation arms race that no amount of individual foresight can prevent.”
If layoffs driven by AI happen faster than displaced workers can find new income, the missing pay packets eat away at the customer spending all businesses rely on, the researchers warned.
But awareness of the danger is not enough to make any individual company stop. Nor can businesses count on market mechanisms to bail them out.
Wage flexibility, new market entrants, and the spending of company owners all change the point at which the trap is sprung, but none of them disarms it, the paper found.
Correcting this distortion
Government intervention fares little better. Of six commonly proposed responses examined in the study, five failed to alter what firms actually do.
A universal basic income props up household incomes without touching any company’s layoff calculus. Taxing capital income leaves the automation decision untouched, as does giving workers a share of profits. Pacts between rival firms to limit job cuts collapse because each signatory still profits from breaking ranks.
The single measure that worked in the model was a Pigouvian levy on automation itself, charging firms, per automated task, for the spending power their layoffs drain from everyone else.
Revenue from the charge could fund retraining that gradually shrinks the underlying problem, according to the paper.
“Out of six popular policy fixes, we find that five of them fail,” Tsoukalas said. “In our model, only a tax on automation itself actually changes the calculus. Most of the policy debate assumes displacement will happen and focuses on picking up the pieces. That’s all necessary, but none of it deals with firms’ automation incentives.”
The authors also said job losses to date remain below the scale at which the effect could be detected, framing their work as a warning about a weakness in market structure rather than a diagnosis of a current crisis.
Source – https://www.hcamag.com/nz/news/general/how-does-the-ai-layoff-trap-hurt-your-business/578680