The Economy Needs a Productivity Boost. Can AI Deliver?

The Economy Needs a Productivity Boost. Can AI Deliver?

Brian Davies, CFA®
Vice President and Senior Wealth Advisor
Washington Trust Wealth Management

Artificial intelligence (AI) has quickly become one of the most debated forces shaping the economic outlook. Will it eliminate millions of jobs, make work optional, or usher in a new era of productivity? Even people “in the know” offer wildly different answers. Some forecast massive white-collar job losses, while others see AI as a transformational technology capable of producing enormous gains in productivity and economic output.

But what if AI’s long-term impact is less about replacing workers and more about replacing missing growth? As labor-force growth slows and populations age, the more consequential question may be whether AI can help fill that widening economic gap.

Drivers of GDP Growth

At a high level, GDP growth is driven primarily by two factors: growth in the labor force (number of workers) and growth in productivity (output per worker). For much of the postwar period, the United States benefited from both. The workforce expanded as the population grew, women entered the labor force in greater numbers, and the baby-boom generation moved through its prime working years.

That demographic support is now weaker. U.S. population growth has slowed, the population is aging and more Americans are moving into retirement. The labor-force participation rate reflects that shift. It peaked at 67.3% in 2000 and today stands near 62%.ⁱ

While the United States is not running out of workers, labor-force growth is unlikely to contribute as much to future GDP growth as it once did. That leaves productivity to do more of the work.

Technology Creates Winners and Losers

Major technological shifts are often overestimated in the near term and underestimated over the long term. The automobile hurt businesses tied to horses and carriage transportation (think buggy whip manufacturers). Automation displaced many production jobs. Since the 1950s, computers have eliminated some clerical functions while creating new industries and making many workers more productive.

These transitions are not painless. Some workers and industries lost out even as the broader economy benefited. AI is unlikely to be different.

The Productivity Question

The more useful macroeconomic question is not whether AI is simply good or bad for employment. It is whether AI can raise productivity enough to offset slower workforce growth. 

AI could help workers produce more through automation, faster analysis and software development, and lower administrative costs. But technological capability does not automatically become economy-wide productivity. Companies must invest, change workflows and determine where AI produces measurable returns. That process could take years, even as the need for higher productivity is becoming more pressing. If labor input contributes less, productivity must contribute more.

This is not a United States problem; it is a global one. Aging populations and lower birth rates are constraining labor-force growth across much of Europe and Japan, while China also faces rapid population aging and population decline.

What Happens Without a Productivity Boost?

The Bureau of Labor Statistics projects labor-force growth of just 0.3% annually from 2024 through 2034, alongside real GDP growth of 1.8%.

That projection underscores how much future growth will depend on productivity. If productivity growth fails to compensate for weaker labor-force growth, the economy’s sustainable growth rate could fall further, unable to sustain the roughly 2% real GDP growth to which Americans have become accustomed. If the structural growth rate moved closer to 1%, it would have serious implications for corporate earnings, government finances, investment returns, and living standards.

So the question is: Can AI generate enough sustained productivity growth to compensate for a workforce that is no longer expanding at the pace it once did?

It may deliver. It may fall short of current expectations. And the gains may take longer to appear—or be distributed less evenly—than AI's strongest advocates expect. While no one knows for certain, we do believe that this technology, overall, will have a positive long-term economic impact. And one thing we do know for certain: the demographic challenge makes the question increasingly difficult to ignore.

Washington Trust Wealth Management Can Help

We know the headlines around AI can be confusing and unsettling. As artificial intelligence, demographic shifts, and changing productivity trends reshape the economic landscape, the experienced advisors at Washington Trust can help you make sense of how these forces could affect your portfolio and long-term growth. Looking closely at your specific goals, time horizon, and risk tolerance, we can work with you to determine the best course for your investment strategy.