Clara Shih: AI Threatens Salaries More Than Jobs

The Impact of AI on Salaries According to Clara Shih

Clara Shih, who led Salesforce AI, highlights a often-overlooked consequence of artificial intelligence on the labor market: the decline in wages. She explains that while layoffs are a major concern, wage reductions pose a more insidious threat. Indeed, when technology simplifies tasks, it decreases the demand for specialized skills, pushing workers to redirect themselves to other sectors. Shih shared these thoughts in a post on X on Sunday.

In the current debate about the impact of AI, job loss is often at the forefront of concerns. However, Shih insists that the real threat lies in the decrease in wages for many employees. She emphasizes that history shows wage adjustments are a frequent and disruptive consequence of technological innovations.

Three Mechanisms of Wage Decline

Shih identifies three ways in which new technologies, like AI, can lead to a decline in wages:

• Intra-sector Pressure: When a sector experiences job losses, the remaining workers find themselves competing for available positions, which exerts downward pressure on wages. Shih cites the example of the American manufacturing industry in the early 2000s. With factory closures, automation, and the relocation of production overseas, laid-off workers had to fight for a reduced number of positions, leading to a decrease in real wages. According to the U.S. Bureau of Labor Statistics, 5.5 million manufacturing jobs disappeared between 2000 and 2017.

• Lowering Skill Levels: Technology can make certain skills less essential, thereby broadening the labor market. Shih notes that AI, like previous technological revolutions, lowers the skill level required for once-prestigious jobs, increasing the labor supply and compressing wages. She takes the example of London taxi drivers, who previously had to memorize thousands of streets and landmarks to pass "The Knowledge," a demanding exam. The advent of GPS and ridesharing apps has reduced the necessity for this expertise, increasing competition among drivers.

• Sector Shifts: Highly skilled workers who lose their jobs often turn to new sectors, frequently accepting lower wages while replacing existing workers. Shih emphasizes that these transitions can lead to wage declines for displaced workers.

For Shih, it is crucial for policymakers and workers to consider not only the potential job losses due to AI but also the wage trends that may result.

The Positive Wage Effect of AI May Diminish

Ioana Marinescu, an associate professor at the University of Pennsylvania, co-authored a recent paper for the Brookings Institution on "intelligence saturation." She told Business Insider that AI may already be approaching the peak of its positive impact on wages.

New technologies tend to initially increase wages by enhancing worker productivity. However, this effect can reverse when automation becomes sufficiently widespread. Marinescu estimates that wage growth could begin to decline when 37% of cognitive tasks are automated, a threshold where automation starts to replace workers rather than complement them.

According to her calculations, the economy has already automated more than 14% of these tasks, suggesting that the peak of wage increases related to AI could occur sooner than many expect.