Companies adopting AI to cut costs by reducing headcount may be creating a hidden risk that damages their own business, according to a new study.
University of Pennsylvania’s Brett Hemenway Falk and Boston University’s Gerry Tsoukalas say firms replacing employees with intelligence tools may be falling into an “AI layoff trap.”
According to the researchers, the rapid pace of employee layoffs could ultimately reduce the number of customers that drive corporate revenues.
“Displaced workers are also consumers, and when their lost income is not replaced, each round of layoffs erodes the purchasing power all firms depend on. At the limit, this becomes self-destructive: firms automate their way to boundless productivity and zero demand.”
The researchers note that even if companies understand the risk, they still automate because their competitors are doing the same, leading to a scenario where everyone loses.
“We show that knowing this is not enough for firms to stop it. In a competitive task-based model, demand externalities trap rational firms in an automation arms race, displacing workers well beyond what is collectively optimal. The resulting loss harms both workers and firm owners.”
Falk and Tsoukalas say they tested common solutions such as retraining, universal basic income and worker ownership, but none were enough to stop the cycle. According to the researchers, only a Pigouvian automation tax can, which means taxing companies when they replace workers with AI, slowing down automation to a level the economy can absorb.
The researchers highlight that the tax revenue could subsequently be used to retrain displaced workers and maintain demand.
“The Pigouvian tax, therefore, has the potential to do double duty: it corrects the externality at the margin, and its revenue can be recycled to shrink the distortion over time.”
The findings come as JPMorgan Chase CEO Jamie Dimon recently warned that AI-driven job disruption could happen so fast that it could create a big problem for society. He highlighted that the rapid adoption of AI could give very little time for companies and governments to adjust or retrain displaced workers.
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