In 2025, the U.S. economy remained resilient despite macroeconomic headwinds, driven by consumer spending and strong AI-related capital expenditures. However, job growth cooled amid an uncertain economic landscape and tighter immigration policies that constrained labor supply. Simultaneously, the increasing adoption of AI across various industries raised concerns about its potential to displace workers.
Policymakers are beginning to acknowledge how technology can enhance productivity and economic growth. The Fed’s latest Summary of Economic Projections (SEP) points to a robust 2026 economy, but only a marginal improvement in employment, implying that productivity gains, potentially fueled by AI, could be the primary engine of growth. In the third quarter of 2025, U.S. productivity jumped 4.9%, the strongest increase in two years, while the Atlanta Fed’s GDPNow model projects Q4’25 GDP to be on pace for 3.7%. These figures suggest that technology may already be boosting the economy despite concerns about the labor market.
However, if AI’s growing role leads to widespread worker displacement—even as productivity gains lift GDP—how can a consumer-driven economy sustain itself if consumers are confronting the threat of job and income losses?
There is no clear answer yet, but for investors, this is an important debate. AI-driven efficiency gains could bolster earnings, but job displacement could weigh on consumer spending, a key driver of corporate profits, and ripple through equity and credit markets. The stakes ahead are high, and if policymakers cannot revive employment using traditional tools in an AI-driven economy, broader solutions, ranging from education reform to workforce retraining, could become essential.
History shows that the initial effects of automation may be offset by the creation of new types of work, suggesting the longer-term outcome may not be as dire as some predict.
Since the advent of ChatGPT in 2022, warnings about AI’s impact on the labor market have proliferated. Some CEOs have warned that AI could replace half of entry-level white-collar jobs by 2030, pushing unemployment to 10-20%. Yet, history shows that groundbreaking innovations often disrupt but also create new job opportunities.
The Industrial Revolution, for example, replaced many hand-weaving jobs but eventually led to new positions, such as office work, and rising wages.
Recent trends indicate that AI development has been driving demand for AI-related skills, consistent with historical patterns in which innovation leads to new forms of labor. A study released prior to the launch of ChatGPT revealed that between 2010 and 2018, job postings requiring AI skills rose among firms well-positioned for AI adoption.
For example, in healthcare, tech skills have become imperative as providers adopt AI diagnostic tools, creating new, increasingly tech-focused roles such as machine learning engineers, data scientists, and informatics specialists.
Recent labor market dynamics have also revealed that demand for AI skills has broadened across industries such as marketing, education, and engineering. Aside from creating new roles that require specialized tech skills, companies are adopting AI to enhance human capabilities in their roles. By redeploying talent into more valuable tasks, such as data interpretation and innovative projects, companies can enhance their offerings and even unlock product innovation.
For example, one leading retailer recently announced plans to boost store associates’ productivity by reducing time spent on shift planning, enabling them to focus on enhancing the customer experience. Another example comes from a leading beauty company, which launched an AI-powered beauty agent to augment its product-centric business, underscoring the growing need for tech talent.
These observable and tangible trends suggest that AI is not just a threat to existing roles or a way for companies to save on labor costs. Innovation is also a catalyst for new and enhanced roles that drive growth in different ways—from time savings to improved customer retention and additional revenue streams.
While the long-term outlook for employment in an AI-driven economy appears promising, the transition may create challenges, as it takes time for companies to adapt their businesses and for workers to upskill and retrain before the benefits become evident.
Indeed, some estimates suggest that in the first year of a rapid technology shock, a 1% rise in labor productivity can temporarily increase the unemployment rate by 0.3%.
Encouragingly, despite fears, mass layoffs attributed to AI have not occurred in significant numbers, even within the tech sector, where AI integration is most visible. Although AI is cited in some layoffs, it remains a minor factor according to recent data, a trend that should be monitored closely, nonetheless.
Still, challenges remain for both workers in occupations vulnerable to AI automation and for younger and inexperienced workers. Job growth has reportedly slowed in roles most susceptible to automation, and AI-adopting firms show sharper declines in junior hiring compared to non-adopters, while senior roles remain stable.
| Occupation | Exposure to AI Automation (% of tasks) |
|---|---|
| Office & Admin Support | 75.5% |
| Business & Financial Operations | 68.4% |
| Computer & Math | 62.6% |
| Sales & Related | 60.1% |
| Management | 49.9% |
| Legal | 47.5% |
Source: Penn Wharton University of Pennsylvania, Principal Asset Management. Data as of publication September 8, 2025.
An environment in which AI-driven job gains are uneven and job losses are increasingly skewed will likely carry implications for policymakers. The Fed—whose mandate includes promoting maximum employment—may ultimately face a strong, productivity-driven economy alongside subdued inflation and rising unemployment, particularly amongst middle-skilled workers, and younger, less experienced employees.
In such an environment, traditional monetary policy tools, such as rate cuts, may not be sufficient to boost labor demand. Government policies that support workers’ development of digital competencies—through accessible retraining programs or education reforms that better prepare future generations for the AI era—could serve as alternative policy solutions to help mitigate uneven labor-market impacts.
The uncertainty surrounding AI’s long-term effects on the labor market persists, yet history indicates that automation-related displacements can be compensated for by productivity gains and job creation in more skilled areas over time. Thus, AI could support overall employment growth rather than merely eliminate jobs, particularly in occupations where it enhances human capabilities. Simultaneously, those in vulnerable roles or with less experience may face negative repercussions as AI adoption progresses, particularly if companies prioritize labor cost reduction through automation.
While perspectives on AI’s labor market impact vary, the increasing demand for tech and AI skills across sectors suggests a transformative change is underway. Job seekers must stay aligned with these shifts, while policymakers need to ensure the workforce can adapt through retraining programs and education reforms that prepare workers for an AI-driven future.
The narrative surrounding AI’s impact on the labor market is complex. The integration of AI holds the promise of productivity and job creation, but it also necessitates proactive measures to address the challenges and disruptions it introduces.
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