The modest job growth alongside robust US GDP growth seen recently is likely to be the new normal in the years ahead. We expect the great majority of US potential GDP growth to come from solid productivity growth boosted by advances in artificial intelligence (AI), with only a modest contribution from labor supply growth due to population aging and lower immigration. AI does appear to be hurting the employment prospects of the most closely exposed workers, such as young technology workers. Employment growth has turned negative in the most AI-exposed industries, but that the aggregate labor market impact remains limited so far, as seen in the lack of a clear statistical link between AI exposure and industry- and occupational-level labor market outcomes. Technical roles like database administrators, financial roles like auditors and information security are the most exposed to AI. Meanwhile, roles in hospitality and manual jobs in manufacturing are the least exposed. In the US start up world, smaller team sizes partly reflect startups’ increasing use of automation and AI-enabled tools allowing them to accomplish more with leaner workforces: in other words, substituting capital for labor while still maintaining or even increasing productivity. Even after funding is secured, startup's tendency to return to additional hires may be declining relative to the payoffs from leaning into AI, automation, and other technical infrastructure. There is a broader productivity story at play in which each worker now contributes more output per dollar of investment. If this path continues, the next generation of fast-growing companies may be defined not by rapid headcount expansion, but by smaller teams achieving more with every dollar raised. We also believe that the full consequences of AI for the labor market might not become apparent until a recession hits. Since the 1970s, most employment losses in routine manual occupations especially those particularly exposed to the technological innovations of the past half-century have come during recessions. Around half of the total decline in the employment share of these occupations has taken place in recessions. Same applies for whenever the next recession comes because companies use recessions to restructure and streamline their workforce by laying off workers in less productive areas. This is especially true when recessions follow productivity booms that give companies some pent-up ability to cut labor costs and improve efficiency without significantly hurting their productive capacity. The best examples is the so-called “jobless recovery” after the 2001 recession, which followed the technology-led productivity boom of the late 1990s. Total employment took a long time to recover as companies continued to shed routine jobs for several quarters after the end of the recession. During that recovery, despite a soft labor market, productivity growth remained elevated and GDP growth rebounded earlier than employment growth. Summary: Whichever way one sees it, recession or no recession, US GDP growth for next several quarters might be jobless GDP growth.
