Labor will cost businesses dearly over the next five years. Demographic trends (an aging workforce, immigration, etc.) will eat away at the labor supply while general macroeconomic expansion pushes up on demand.
This is a recipe for expense.
Using the US Bureau of Labor Statistics’ US Median Annual Earnings data as a benchmark, the rise in labor costs that we are projecting to occur from the present through year-end 2029 will eclipse the rise that typically occurs over a five-year period.
Why AI Will Not Stem Rising Labor Costs
Despite the excitement around AI, our analysis suggests that its adoption will not be pervasive enough to prevent the stronger-than-historically-typical rise we are expecting for labor costs over the next five years.
- Small- to Mid-Sized Businesses Will Likely Lag in AI Adoption
Small- to mid-sized businesses account for much of the US workforce. At the same time, they tend to adopt new technologies, especially capital-intensive ones like AI, more slowly than their larger counterparts. This is one obstacle to AI meaningfully alleviating hiring pressure in the near to medium term.
- Blue-Collar Jobs Are Not Disappearing
AI is unlikely to automate away blue-collar labor in the near term. That would require advanced robotics, an expensive proposition with a lengthy runway for a myriad of reasons. Such measures will likely enhance productivity in fields like logistics, manufacturing, and construction, but they will not eliminate the need for human workers today. These workers are contending with the cumulative impact of inflation and will seek higher pay, contributing to the upward wage-price spiral that also impacts white-collar workers.
- White-Collar Work Will Change, but Not Disappear
AI may displace select white-collar roles. But across sectors such as consulting, engineering, law, and accounting, AI will serve as a force multiplier rather than a direct replacement. Such roles will likely become more productive rather than obsolete, which will ease some of the pressure on hiring, but it will not eliminate the need for skilled minds altogether. Expect to see more displacement for entry-level roles than experienced roles, along with an increased value on customer interaction.
We saw this happen in the 1990s with ATMs. Unsurprisingly, people thought bank tellers would disappear — they have not. Instead, banks were able to reduce the number of tellers physically within the bank, which enabled the banks to open up new locations in previously underserved geographies.
Arguments Against Our Perspective
It is important to address the counterpoints to our analysis:
Faster Adoption Than Anticipated
It is possible that those small- to mid-sized businesses will adopt AI faster than anticipated and, due to their volume, make a bigger difference in workforce needs than we anticipate. Additionally, if there are further technological advancements, such as quantum computing, these could speed up adoption faster than we are currently on track to do.
Underplaying Investment Appetite
We may be overestimating the deterrent effect of higher interest rates. Despite tighter financial conditions, businesses may still be eager and capable of making the capital investments required to harness AI’s full potential.
Final Thoughts
Our assessment is that the factors that will drive labor costs upward to the next decade will not be overcome by AI adoption. You will need a solid plan to protect your margins amid an essentially unrelentingly inflationary environment. And those conditions are likely to persist right up until the depression we are forecasting to take hold around 2030.
To learn more about how the wage and inflation trends will impact your specific business, contact us today.