AI innovation and labor market polarization: Evidence from European regions

We study whether AI innovation changes labor-market polarization by weakening the relative position of high-skilled workers. We develop a CES production framework showing how AI affects the wage-cost ratio between high- and low-skilled workers through wage and employment margins. We test the model’s predictions using European regional labor-market data and find that AI reduces the relative wage-cost ratio by nearly 7 percent on average, with effects broadly split between wage and employment adjustments. These results are primarily driven by regions in countries highly specialized in AI technologies. Overall, our evidence suggests that AI may counteract the polarization effects associated with over two centuries of technological change.