The Horse Condition: Labor Demand in the Age of AI

Abstract

Will AI do to human workers what the internal combustion engine did to horses? A large literature measures what AI can technically do. That is a question about displacement inside activities. But aggregate labor demand depends on what consumers buy with the savings. Any cost reduction frees up spending. Labor demand persists as long as that spending lands on anything with human labor somewhere in its value chain. I formalize this through an accounting identity: employment equals total expenditure times the embodied human-labor share, divided by the wage. I derive a support bound on the embodied labor share. The share can vanish only if consumer spending on every activity with embodied labor bounded away from zero itself vanishes. I identify seven mechanisms that determine whether it does. All seven resolved against horses. All remain open for humans.