The AI Layoff Trap

2026

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AI-generated summary

1) This paper argues that competitive incentives drive firms to over-automate AI, leading to a collectively suboptimal outcome that harms both workers and firm owners.
2) * Explores the "AI layoff trap" where firms automate to cut costs but destroy demand, creating a self-destructive cycle.
* Analyzes various policy interventions, concluding that only a Pigouvian automation tax can effectively address the externality.
* Demonstrates that the over-automation problem is robust to extensions like endogenous entry, AI productivity gains, and imperfect competition.
3) AI, automation, labor displacement, Pigouvian tax, market failure

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