Youth is losing to experience in this job market

EVERY time there is fresh evidence of labour market softness, as with the July jobs report, an obvious question is raised about the health of the US economy. Now, increasingly, economists and employees are asking a second question: Are we seeing the impact of artificial intelligence on knowledge workers?

There are plenty of signs that AI is making the job market tougher for young college graduates, but for the 22 million people with jobs that are categorised as professional and business services, wage growth has actually accelerated over the past year to levels solidly above pre-pandemic rates. This suggests that the state of the labour market for white-collar workers is best described as bifurcated – one where there are both winners and losers rather than one where most workers are worse off. Despite the overall unemployment rate being a solid 4.2 per cent, conditions for young workers are soft. Only 65.3 per cent of 20- to 24-year-olds were employed last month, nearly three percentage points lower than the post-pandemic peak in January 2024, and roughly the same proportion as we saw in December 2008 following Lehman Brothers’ collapse. For the millions of college graduates in the 22 to 29 age group, the unemployment rate stood at 3.7 per cent in the first six months of the year, compared with 2.8 per cent in 2019, according to US Current Population Survey data. Such numbers are backed up by numerous news reports as well as comments from corporate executives on how they see AI transforming labour needs. Internship postings this spring were down. A recent Wall Street Journal report noted that the share of entry-level roles relative to all new hires has slumped by 50 per cent since 2019 among the biggest technology companies, while another pointed to consultancy firm McKinsey putting together smaller but more experienced teams as it adds AI to the mix.

It’s also becoming more common for chief executive officers to talk about AI eventually leading to significant layoffs. At Meta Platforms, Alphabet and Microsoft, employee headcount grew 64 per cent between 2019 and 2022 but just 3 per cent over the past three years. This comes at a time when the three tech juggernauts collectively plan more than US$250 billion in capital expenditures over the next 12 months, suggesting that there’s a tradeoff between investing in AI and hiring workers.

While the number of jobs in the professional and business services’ category of the non-farm payrolls data shrank slightly over the past year, wage growth accelerated to just above 5 per cent in July. Compare that with 2019, when employment growth averaged 1.3 per cent while wages rose 3.7 per cent.

One explanation for this is that there are composition effects at work. If companies aren’t hiring young workers, who tend to be lower paid, we’re going to get lower employment growth in professional and business services along with increasing average compensation levels, which could overstate the extent to which older, more experienced workers are getting raises.

But there are reasons to believe some workers really are gaining from this phase of the AI boom. There are the pro athlete-type offers being made to the select few engineers building new AI models. Outside the tech sector, there’s the experience of companies such as McKinsey, where “mediocre expertise” is going away while specialised expertise becomes more valuable in combination with AI agents. That dovetails with Nvidia CEO Jensen Huang’s prediction that workers who use AI will be fine in this transition. It’s reasonable for all workers to be uncomfortable with a technological innovation that hasn’t disrupted most workers yet but where the ultimate outcome is so uncertain. There’s no guarantee that the next generation of AI models won’t come after workers with more advanced skills. It’s also a far cry from the technology boom of the late 1990s, which was accompanied by broad-based employment, compensation and consumption growth.

With the AI boom, it feels like the bigger it gets, the more losers there will eventually be, either from workforce disruption or a malinvestment-induced bust. Unless there are signs that it’s leading to more winners than losers, this is a boom that understandably generates as much fear as it does optimism.  BLOOMBERG