Davis says, “Our findings suggest that continuation of the status quo, the basic expectation of most economists, is actually the least likely outcome.” “We estimate that AI will have an even greater impact on productivity than the personal computer. And we estimate that a scenario where AI transforms the economy is far more likely than a scenario where AI disappoints and fiscal deficits dominate. The latter will likely lead to slower economic growth, higher inflation, and rising interest rates.”
Implications for business leaders and workers
However, Davis doesn’t sugar-coat it. Although AI promises economic growth and productivity, it will be disruptive, especially for business leaders and workers in knowledge sectors. “AI is likely to be the most disruptive technology to change the nature of our work since the personal computer,” Davis says. “People of a certain age may remember how the widespread availability of PCs eliminated many jobs. It did not eliminate jobs, but rather allowed people to focus on higher-value activities.”
The team’s framework allowed them to examine AI automation risks across more than 800 different businesses. Research indicated that while the potential for job losses exists in more than 20% of businesses as a result of AI-powered automation, the majority of jobs – possibly four out of five – will result from a mix of innovation and automation. Workers’ time will increasingly shift to higher value and specific manual tasks.
It introduces the idea that AI can serve as a co-pilot in a variety of roles, performing repetitive tasks and generally assisting with responsibilities. Davis argues that traditional economic models often underestimate the potential of AI because they fail to examine the deep structural effects of technological change. “Most approaches to thinking about future growth, such as GDP, do not adequately account for AI,” he explains. “They fail to link short-term changes in productivity with three dimensions of technological change: automation, growth, and the emergence of new industries.” Automation increases worker productivity by tackling routine tasks; Augmentation allows the technology to act as a co-pilot, augmenting human skills; And the creation of new industries creates new sources of growth.
implications for the economy
Ironically, Davis’ research suggests that one reason for the relatively low productivity growth in recent years may be a lack of automation. Despite a decade of rapid innovation in digital and automation technologies, productivity growth has slowed since the 2008 financial crisis, reaching a 50-year low. This appears to support the view that the impact of AI will be modest. But Davis believes automation has been adopted in the wrong places. “What surprised me most was how little automation has happened in services like finance, health care and education,” he says. “Outside of manufacturing, automation has been very limited. It has been stifling growth for at least two decades.” The service sector accounts for over 60% of US GDP and 80% of the workforce and has experienced the lowest productivity growth. Davis argues that this is where AI will make the biggest difference.
One of the biggest challenges facing the economy is demographics, as the baby boomer generation retires, immigration slows and birth rates decline. These demographic constraints reinforce the need for technological acceleration. “There are concerns about AI being dystopian and causing massive job losses, but we will soon have fewer workers, not many more,” Davis says. “Economies across the US, Japan, China and Europe will need to increase work automation as their populations age.”
Consider nursing, for example, a profession in which empathy and human presence are irreplaceable. AI has already shown potential to enhance rather than automate this area, streamlining data entry into electronic health records and helping nurses reclaim time for patient care. Davis estimates that these devices could increase nursing productivity by 20% by 2035, a significant benefit as health care systems adapt to aging populations and increasing demand. Davis says, “In our most likely scenario, AI will offset demographic pressures. Within five to seven years, AI’s ability to automate parts of the work will be the equivalent of adding 16 million to 17 million workers to the American labor force.” “It’s basically the same as if everyone turning 65 in the next five years decides not to retire.” They estimate that more than 60% of occupations, including nurses, family physicians, high school teachers, pharmacists, human resources managers, and insurance sales agents, will benefit from AI as an enhancement tool.
Implications for all investors
As AI technology spreads, the strongest stock market performers will not be its creators, but its users. “This makes sense,” says Davis, “because general-purpose technologies increase productivity, efficiency and profitability across entire sectors.” The adoption of AI is creating flexibility for investment choices, meaning it may be appropriate to diversify beyond technology stocks as reflected in Vanguard’s Economic and Market Outlook to 2026. “As that happens, the benefits extend beyond places like Silicon Valley or Boston to industries that apply technology in transformative ways.” And history shows that early adopters of new technologies reap the biggest productivity rewards. “We’re clearly in the experimentation phase of learning by doing,” says Davis. “Companies that encourage and reward experimentation will get the most value from AI.”
