AI risks deepening divide between investors and workers

Economists at Australia’s largest business lender warn that the gap between those earning income from investments and those working to make ends meet could worsen due to the artificial intelligence revolution.

NAB chief economist Sally Auld and senior economist Taylor Nugent found in a research note published Friday that while the adoption of artificial intelligence is expected to boost productivity, without policy intervention the benefits will be felt unevenly across the economy.

Essentially, AI could cause the economic pie to grow but workers not getting a bigger slice.

“While economists often focus on the efficiency gains of AI, there are also potentially important distributional consequences,” Dr Auld and Mr Nugent wrote.

“In fact, one of the concerns that many people have about the rise of AI is that it risks increasing income and wealth inequalities unless careful policy decisions are made.

“If AI essentially replaces labor without a commensurate increase in new tasks for labor, it could further transfer income from labor to owners of capital.”

Low interest rates and financial deregulation have increased asset prices in recent years.

However, workers’ share of income decreased.

Between the 1990s and the COVID pandemic, the gap between those who earn income from capital and those who work to make ends meet has widened, according to research by economist Gianni La Cava.

While labor’s share of income has increased during the COVID pandemic, technology-exposed sectors such as retail and finance have experienced a significant decline.

“It’s a bit like the AI ​​story that people are worried about now, in finance, where a lot of bank tellers were replaced by ATMs in the 90s and 2000s,” Dr La Cava told AAP.

“That lowered the wage bill at the banks, which in turn lowered the labor share.”

Because capital tends to be concentrated among wealthier individuals, capital’s higher share of income tends to lead to greater economic inequality.

It could be more easily changed to minimize tax requirements, Treasury Secretary Jenny Wilkinson said on Thursday.

Labor has sought to shape its controversial budget tax changes around this trend.

Prime Minister Anthony Albanese told ABC News on Thursday that replacing the 50 per cent capital gains tax cut with indexation would help rebalance the tax treatment of income from work, the way most Australians make their living, with income earned from assets.

The AI ​​investment boom is bringing huge benefits to people with stakes in companies like Anthropic, OpenAI, and Palantir.

Anthropic, the company behind chatbot Claude, became the world’s most valuable artificial intelligence company on Friday, reaching a valuation of more than $1.3 trillion.

All this investment needs to yield a return.

One way for employers to justify their spending on AI is to use it to reduce labor costs.

That’s a worst-case scenario, but Anthropic CEO Dario Amodei predicted that AI could cause unemployment to rise by as much as 20 percent.

While AI has the potential to boost jobs and incomes as higher productivity and growth increases demand for workers, NAB found that employment in occupations with greater exposure to AI is around nine per cent lower since 2022.

“For now, evidence of slower employment growth in occupations with higher exposure to AI suggests that offsetting benefits from additional labor demand may take time to transfer,” Dr Auld and Mr Nugent said.

More importantly, demand for AI computing power has disrupted Australia’s capital markets.

Data center investment led to a massive 6.5 per cent increase in private capital spending in the March quarter, although other sectors were relatively soft.

Westpac senior economist Pat Bustamante has predicted Australia’s data center investment pipeline will exceed $155 billion, or 5.6 per cent of GDP, including the clean energy spend needed to power it.

“Most importantly, this is just phase one,” he said.

“As data centers enable widespread adoption of AI, its greater returns through stronger productivity come later, in the production phase.”

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