The Daily Spark

When China joined the WTO in 2001, US manufacturing was hit hard, but US nationwide unemployment stayed remarkably low because offsetting forces like service sector growth, export gains and business expansion absorbed much of the blow.

The AI shock is following the same playbook. The displacement force is different this time, impacting cognitive and white-collar work rather than factory floors. But every other element of the structure is remarkably familiar: a powerful disruption, immediate job losses in exposed sectors, and a wave of offsetting gains that keep headline unemployment low, see chart below.

And if history is any guide, the gains will be substantial. Just as cheaper Chinese inputs helped US businesses grow and hire, AI is already accelerating business formation and productivity gains across the economy. Half of post-1980 job growth came from occupations that didn't exist in 1980.

The bottom line is that we have seen this before. Just as the China shock gave way to new industries and stronger businesses, AI will drive productivity gains and create opportunities that will more than replace jobs lost today.

Unlike previous capex cycles, today's investment boom is concentrated entirely among large-cap firms, see chart below.

Online booking was supposed to wipe out the travel agent. It did not. Jevons paradox explains why: cheaper travel booking created more total travel demand, and some of that flowed back to human agents for complex trips, luxury travel and corporate accounts, see chart below.

Nearly two million workers in the Philippines now work in call centers, up every year since 2016 and through the AI boom. This is Jevons paradox in action: as AI makes call center work cheaper and faster, companies are buying more of it, not less. Lower cost per interaction does not mean fewer interactions. It means more customers served, more channels opened and more markets worth reaching. The technology that was supposed to shrink the industry is fueling its expansion.

Sectors with the highest AI adoption rates have also seen the strongest growth in new business applications since 2022, showing that AI is lowering the barriers to starting a company, see chart below.

Since the Fed started cutting interest rates in 2024, households have been buying the front end of the yield curve and selling the long end, see chart below.

A decade ago, AI was supposed to replace radiologists. Today, radiologists make more than $500,000 per year, and their employment continues to grow, see chart below. Reading scans is a task, not a job, and when the task gets cheaper, demand for the job grows.

A lawyer drafts contracts, negotiates terms, manages filings, advises clients and flags risk.

An accountant reconciles books, prepares workpapers, handles audits and prepares tax returns.

A consultant scopes projects, runs interviews, builds decks and tracks implementation.

Giving AI tools to knowledge workers will lower the cost of doing some of these tasks. And when things get cheaper, demand goes up.

That is the Jevons paradox.

When steam engines made coal more efficient, Britain didn't burn less coal, it burned more. The same pattern is happening for cheaper legal services, consulting services and financial services.

Call it the Jevons employment effect: When the cost of professional work falls, the addressable market expands and the total number of firms and workers in the field grows, see the first chart below. That includes startups launched by recent college graduates, who can now compete with established firms on certain tasks. That is likely the reason why the unemployment rate is falling more for young workers, see the second chart, and the number of new businesses created every week is at the highest levels in US history, see the third chart.

The bottom line is that cheaper inputs don't shrink industries. Instead, AI is going to increase both productivity and employment.

Wage growth is beginning to pick up, particularly among job switchers, see the first chart below. This acceleration suggests a tightening labor market, likely driven by tailwinds to growth from AI and the One Big Beautiful Bill and by the sharp slowdown in immigration, see the second chart.

The UK, Australia, Germany and France are more vulnerable to higher jet fuel prices, see chart below.