Artificial Intelligence and Labor Market Transformation: Employment Effects, Wage Inequality, and Policy Responses in the Era of Generative AI

Abstract

This study examines the employment and wage effects of artificial intelligence adoption across 38 OECD countries from 2019 to 2025, a period encompassing the transformative emergence of generative AI technologies. Using a comprehensive AI Adoption Index constructed from enterprise investment data, patent filings, and workforce surveys, we employ instrumental variable estimation to identify causal labor market effects. Our findings indicate that a one standard deviation increase in AI adoption is associated with a 2.3% reduction in employment in routine cognitive occupations but a 1.8% increase in employment requiring complex problem solving and interpersonal skills. Wage effects exhibit substantial heterogeneity: workers in the top income quintile experience wage gains of 3.8%, while middle quintile workers face modest declines of 1.4%. We find that countries with robust active labor market policies and portable benefits systems demonstrate significantly smoother workforce transitions. The results suggest that AI represents a skill biased and task displacing technological change requiring coordinated policy responses encompassing education reform, social protection modernization, and strategic public investment in complementary human capital formation.