China's AI expansion adds to existing employment crisis
New York
China's rapid AI adoption is reshaping its labour market, with analysts debating whether it will alleviate workforce shortages or deepen deflationary pressures. Morgan Stanley's latest report warns that AI-driven automation could exacerbate China's employment challenges, particularly given its high youth unemployment rate (over 15 percent) and prolonged deflationary trends.
AI's ability to replace junior-level cognitive tasks may encourage companies to invest more in technology while reducing hiring, potentially leading to slower wage growth and economic stagnation. However, Ding Shuang, chief Greater China economist at Standard Chartered, argues that AI is not the primary driver of deflation. Instead, overcapacity in key industries and weak domestic demand are the main culprits.
Despite concerns, AI's economic potential remains significant. The International Monetary Fund estimates that 40 percent of jobs in emerging markets are exposed to AI, with 16 percent complemented by automation and 24 percent fully replaced. To mitigate disruptions, policymakers should enhance social protections, expand AI-focused education, and encourage job creation in sectors less susceptible to automation. Ultimately, AI's impact on China's economy will depend on balanced policy measures and strategic workforce adaptation.
China's rapid AI adoption is reshaping its labour market, sparking debate over whether it will alleviate workforce shortages or deepen deflationary pressures. While AI-driven automation offers long-term productivity gains, concerns persist about its immediate impact on employment and wage growth.
China has been battling prolonged deflationary risks, with its producer price index contracting for 30 consecutive months, including a 2.7 percent drop in April. The employment market remains sluggish, with urban youth unemployment exceeding 15 percent. AI could generate a labour equivalent value of 6.7 trillion yuan ($931 billion)—approximately 5 percent of China's nominal GDP.
To mitigate disruptions, policymakers should enhance social protections, expand AI-focused education, and encourage job creation in sectors less susceptible to automation. While AI may eliminate some roles, it also fosters new employment opportunities. The future of China's labour market will depend on balanced policy measures and strategic workforce adaptation.
Despite optimism surrounding AI's potential, its widespread adoption may not significantly enhance China's productivity. While automation can streamline operations, it does not directly address deeper structural issues such as declining birth rates, shrinking workforce, and weak domestic demand. In 2023, China recorded only 9 million births, the lowest since 1949, with the population dropping for the second consecutive year to 1.4 billion, a decline of over 2 million.
AI's displacement of junior-level cognitive jobs could worsen China's employment crisis, particularly as urban youth unemployment exceeds 15 percent. While AI may create new roles, the transition requires extensive reskilling, which China's current education system struggles to accommodate. Additionally, over investment in AI could exacerbate economic stagnation, as companies prioritize automation over workforce expansion.
To mitigate these risks, policymakers must strengthen social protections, invest in AI-focused education, and promote job creation in sectors less vulnerable to automation. Without balanced policy measures, AI's rapid integration may deepen economic instability rather than drive sustainable growth.
China's deflationary pressures stem from multiple economic factors, with AI playing only a minor role in the broader downturn. The country's weak property market and sluggish domestic demand have been the primary drivers of deflation, overshadowing the impact of AI adoption. Despite concerns about automation displacing workers, recent data suggests that AI's effect on employment remains limited.
A UBS survey conducted between March 18 and April 17 among 404 senior executives in China revealed that 73 percent of respondents had integrated AI technologies into their businesses, primarily to enhance efficiency and improve product quality. While 15 percent reported workforce reductions, 22 percent stated they had created new positions due to AI adoption. Additionally, 46 percent of executives noted salary increases linked to productivity gains, whereas 18 percent reported wage cuts for certain employees.
These findings indicate that AI has not yet caused widespread disruption in China's labour market or household income. However, as AI adoption accelerates, policymakers must ensure balanced economic strategies that address employment shifts, wage stability, and broader economic challenges. The future of AI's role in China's economy will depend on how businesses and regulators navigate technological advancements alongside existing structural issues.
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