Challenges and opportunities posed by artificial intelligence for income inequality and the public finances
A joint report from the Economic and Social Research Institute (ESRI) and Department of Finance finds that the adoption of Artificial Intelligence (AI) in Ireland is likely to lead to moderate increases in income inequality in the short to medium term. This change will be driven by job displacement among workers whose jobs can be partially carried out using AI, wage increases for workers who become more productive through the use of AI and increased returns to capital investment.
The study examines how AI may affect employment, wages and capital income in Ireland over the short to medium term. The research focuses on the current occupational structure and could not take into account what new jobs or increased opportunities AI might generate in certain sectors. Using international evidence and the ESRI’s tax-benefit model SWITCH, the research simulates a range of AI adoption scenarios.
The research finds that AI adoption among Irish firms is likely to lead to job losses, concentrated among highly educated workers, reflecting the strong exposure of high-skilled occupations to AI technologies. For those who remain in work, average wages are likely to rise, reflecting productivity gains from AI tools. Returns to capital are also expected to increase, modestly on average, but with disproportionate benefits accruing to the highest-income households who hold most capital assets. Taken together, these forces produce an overall decline in average household disposable income in the short-term.
Ireland’s tax and welfare system is well-placed to absorb most of the income losses for lower-income households in the short-term through increased welfare entitlement and reduced tax liability. It will also absorb roughly half of the losses for the highest-income households. However, all AI adoption scenarios considered result in a small to moderate increase in household income inequality as job losses, wage increases and capital income increases together widen the gap between rich and poor.
The fiscal impacts are highly scenario-dependent. If employment losses are small or re-allocation of workers is fast, Exchequer revenue may increase due to productivity gains. If job displacement is large, however, income tax receipts will fall relative to the baseline and welfare spending will rise, putting significant pressure on the public finances. These findings highlight the importance of investment in skills, lifelong learning and retraining to help workers transition into AI-complementary or under-supplied occupations.
Commenting on the report, author Karina Doorley of the ESRI stated: “The effect of AI on the labour market and the distribution of income is still highly uncertain. Income inequality, measured by the Gini coefficient, is likely to rise in any AI adoption scenario as job losses and wage and capital income increases result in income polarisation. Ensuring a speedy digital transition will minimise the inequality effects.”
Commenting on the report, author Sorcha O’Connor of the Department of Finance stated: “This paper marks the third publication in a series of research being carried out by the Department of Finance into the potential impacts of AI adoption in Ireland.
The findings highlight the importance of upskilling, retraining and lifelong learning to smooth the AI transition, so people can more easily change jobs and sectors. The widespread adoption of AI will likely boost productivity and raise living standards in the long-term. However, it’s important that these benefits are widely dispersed and that everyone benefits. This research offers valuable insights for consideration into how this transition is managed.”