The Brookings Institution has issued a sobering warning: the AI revolution may not only reshape financial markets but also trigger a boom-bust cycle in wages, creating what researchers describe as an inverted U-shaped curve in worker incomes.
Wages Rise, Then Fall
The study, led by Konrad Kording of the University of Pennsylvania and Ioana Marinescu of the University of Chicago’s School of Social Policy and Practice, used simulations to model the impact of AI adoption. Their findings suggest that wages initially rise as productivity surges, but once automation becomes widespread, demand for human labor declines.
Workers are then forced into lower-value-added roles, erasing earlier gains. Even as wages fall, overall output continues to grow—though the benefits skew heavily toward capital rather than labor.
Intelligence Saturation
Researchers describe this dynamic as "Intelligence Saturation." AI enhances the intellectual capacity of the economy, but its gains eventually slow due to the limits of human-machine collaboration and the reliance on physical tools in real-world work.
The Brookings study rejects extreme scenarios of "unlimited prosperity" or "mass unemployment." Instead, it emphasizes a more nuanced risk: long-term wage decline even as productivity and corporate profits rise.
Policy Recommendations
To mitigate the risks, the authors propose three measures:
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Slow automation: Proactively pace adoption to avoid sudden labor market disruptions.
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Invest in physical capital: Expand spending on equipment and infrastructure to sustain productivity alongside AI.
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Tax virtual service replacement: Levy a special tax on online services that displace offline industries, echoing Senator Bernie Sanders’ "robot tax" proposal.
The goal is to prevent AI from hollowing out the industrial ecosystem and to balance innovation with social equity.
Distributional Concerns
The study also highlights inequality risks. While AI may boost stock prices and corporate profits, its dividends could be concentrated among wealthy households and large firms. That concentration would limit AI’s ability to drive broad-based consumer spending, leaving many workers facing reduced income and job demotion.
Broader Implications
The findings arrive at a time when policymakers are grappling with how to regulate AI’s rapid expansion. For businesses, the research underscores the importance of balancing efficiency gains with workforce sustainability. For governments, it raises questions about taxation, redistribution, and the pace of automation.
As Brookings notes, wage fluctuations in the AI era are not anomalies but natural consequences of shifting intellectually intensive tasks from humans to machines. Without intervention, the U-shaped wage curve could become a defining feature of the next economic cycle.
The Bottom Line
AI is poised to deliver enormous productivity gains, but the Brookings study warns that workers may not share equally in the benefits. Unless policymakers act, the AI wage crisis could leave labor bearing the brunt of technological progress—stable output, rising capital returns, but declining wages.