Payrolls to Prompts: Firm-Level Evidence on the Substitution of Labor for AI (arxiv.org)

A recent study titled "Payrolls to Prompts" provides crucial evidence that generative AI is effectively substituting human labor within firms. By analyzing expenditure data from a large U.S. expense management platform, researchers found that companies with higher prior spending on online labor marketplaces, like Upwork and Fiverr, reported a notable shift towards AI adoption following the release of ChatGPT in October 2022. Specifically, firms in the top exposure quartile increased their AI spending significantly while simultaneously decreasing their contracted labor expenses. This substitution effect was quantified, revealing that a $1 reduction in online labor correlates with an additional $0.03 in AI spending, highlighting considerable cost-saving opportunities as firms transition tasks from human workers to AI services. This research holds significant implications for the AI and machine learning community, as it not only showcases the accelerating integration of AI into business practices but also underlines the gradual nature of this shift. The findings suggest that generative AI is increasingly seen as a viable alternative to contracted labor, potentially reshaping labor markets and production methodologies. The evidence presented here represents one of the first granular analyses showing how firms adjust spending in response to AI advancements, fueling discussions on the broader impact of AI on employment and operational efficiency.