AI adoption, productivity and employment: evidence from European firms
Summary
Focus
The rapid rise of artificial intelligence (AI) is reshaping economies and industries, but its impact on productivity and employment remains uncertain. Understanding how AI adoption influences firm performance and workforce outcomes is critical, yet robust evidence on its firm-level effects outside the United States remains scarce. Our analysis explores the effects of AI adoption in European firms, focusing on productivity gains, employment dynamics and the role of complementary investments in unlocking AI's potential.
Contribution
Our paper provides causal evidence on the impact of AI adoption on firm-level productivity and employment in Europe, using a large sample of European and US firms and a novel methodology that matches European firms with comparable US firms to isolate the effects of AI exposure. By leveraging this approach, our research identifies how AI adoption interacts with firm size, financial conditions and complementary investments, offering new insights into the mechanisms driving productivity gains and their uneven distribution across firms.
Findings
AI adoption increases labour productivity in the short run by 4% on average, driven by capital deepening rather than job displacement. Workers in AI-adopting firms benefit from higher wages, while employment levels remain unchanged in the short term. However, benefits are unevenly distributed, with medium and large firms experiencing the largest gains. Complementarity with investments in software, data and workforce training can support the productivity-enhancing benefits of AI. These findings highlight the need for targeted policies to support smaller firms and ensure inclusive growth.
Abstract
This paper provides new evidence on how the adoption of artificial intelligence (AI) affects productivity and employment in Europe. Using matched EIBIS-ORBIS data on more than 12,000 non-financial firms in the European Union (EU) and United States (US), we instrument the adoption of AI by EU firms by assigning the adoption rates of US peers to isolate exogenous technological exposure. Our results show that AI adoption increases the level of labor productivity by 4%. Productivity gains are due to capital deepening, as we find no adverse effects on firm-level employment. This suggests that AI increases worker output rather than replacing labor in the short run, though longer-term effects remain uncertain. However, productivity benefits of AI adoption are unevenly distributed and concentrate in medium and large firms. Moreover, AI-adopting firms are more innovative and their workers earn higher wages. Our analysis also highlights the critical role of complementary investments in software and data or workforce training to fully unlock the productivity gains of AI adoption.
JEL Classification: D22, J24, L25, O33, O47
Keywords: artificial intelligence, firm productivity, Europe, digital transformation
