Introduction

Much of the policy conversation around AI begins from the assumption of imminent labour collapse. The dominant image is one of rapid displacement, mass unemployment, and urgent redistribution.

That is not the most plausible near-term trajectory.

Over the next decade or so, AI is more likely to present Australia with a capital-intensive adjustment process interacting with existing structural bottlenecks — especially housing, energy, and regulatory capacity. The macroeconomic picture will be mixed: inflationary in some channels, disinflationary in others, with uncertain interest-rate dynamics.

Before we argue about policy responses, it is worth being clear about the likely first-order effects.

Business and Employment Adjustment will be Slow

I discuss why in Programming in the Age of Abundance. In summary:

Major technologies take time to diffuse. Electrification, computing, and the internet all required decades before their productivity effects were fully realised.

AI adoption will also be gradual.

Deploying AI at scale requires:

Complementary capital investment,
Process redesign,
Integration with legacy systems,
Governance and compliance adaptation,
Human training.

Even where productivity gains are large in controlled settings, translating those gains into organisational transformation is slow.

If white-collar work becomes cheaper — programming, drafting, research, compliance — that does not automatically imply mass layoffs. In many cases, it implies more of that work gets done. When the marginal cost of producing something falls, demand tends to rise.

If software becomes cheaper, we produce more software. If analysis becomes cheaper, we do more analysis. If drafting becomes cheaper, more drafting occurs.

This does not rule out disruption. But it does suggest that aggregate employment effects are likely to unfold gradually rather than catastrophically.

The Macroeconomic Picture: A Capital Shock Meets a Productivity Shock

AI has two opposing macroeconomic impulses.

Near-Term: An Investment Boom

AI is capital-intensive. Much of the economic growth in the US is investment in AI. Data centres, specialised chips, transmission infrastructure, and generation capacity are all in high demand. Australia’s exposure to global capital markets means we are not insulated from the resulting investment surge.

An investment shock tends to:

Increase demand for capital;
Raise the marginal product of capital; and
Put upward pressure on the real interest rate.

Energy is likely to be the binding constraint. AI workloads are electricity-hungry. Australia’s grid is already under strain, fragmented across states, and facing an ongoing transition away from coal.

If electricity supply lags demand, relative energy prices will rise. Construction costs for data centres and transmission will rise.

In the near term (1–5 years), we should expect:

Elevated capital expenditure;
Pressure on energy systems;
Mixed inflation signals; and
Tight conditions in construction and infrastructure labour.

Medium-Term: Broad Productivity Gains

Medium term, chip production will increase, data centres will get built out, and energy production will increase, so the initial inflationary effects will taper off.

At the same time, AI will be producing some significant deflationary effects, particularly in services.

As I discussed in the my previous piece, the hyperbole surrounding a “white-collar bloodbath” are largely unfounded. Still, productivity gains in programming appear to be real and growing. It would be surprising if there wasn’t a widespread productivity shock to virtually all white collar occupations.

And there will surely be productivity gains in blue-collar occupations, if only through the likes of reducing paperwork.

Widespread disinflation will counter the inflationary pressures from the AI Capex, in the medium term. How that balance will play out remains to be seen. But disinflation does not automatically imply lower real interest rates.

If total factor productivity rises and the marginal product of capital rises with it, the equilibrium real rate (r*) may increase even as inflation falls. Nominal rates become ambiguous, depending on how monetary authorities respond and how global savings evolve.

Layered on top of this are demographic forces that likely push r* downward over the long term.

Transitional Labour Market Stress

There will certainly be sectoral disruption.

Some tasks will shrink. Some occupations will expand. Entry-level white-collar roles may change substantially. Certain administrative layers may thin out. Whether this produces large aggregate unemployment is much less clear.

History suggests that technological transitions are uneven but rarely instantaneous. Adjustment occurs through attrition, role redesign, and shifting demand rather than immediate mass displacement.

Transitional stress is likely. Persistent, economy-wide unemployment is not a foregone conclusion.

AI Rents and Fiscal Responses

It appears that other things being equal, much of the AI rents are likely to go to large tech firms and the wealthy. This would produce a higher propensity to save, pushing down global interest rates.

Other things may well not be equal, though. There appears to be substantial appetite for taxing these rents [2] .

If governments successfully capture and spend a large share of those rents, demand pressure and interest rates may instead rise.

For Australia, as a small open economy, these global fiscal dynamics will shape our domestic rate environment.

Energy as the Binding Constraint

Shadow of the 70s: energy demand threatens to result in grid bottlenecks, challenges to generation capacity, and commodity price rises.

AI workloads require reliable, high-density electricity supply. At the same time, Australia is transitioning its energy system and electrifying transport and industry.

If generation and transmission expansion lag demand, energy becomes the limiting factor in AI diffusion. In that case, inflationary pressures from energy will offset some productivity-driven disinflation elsewhere.

This is not speculative. It is an engineering problem.

Conclusion: A Mixed Balance

Leaving aside extreme scenarios, the next decade is unlikely to resemble either a labour apocalypse or a frictionless productivity boom.

In the near term:

AI will drive capital formation,
Energy systems will be strained,
Inflation signals will be mixed,
Labour market adjustment will be uneven.

In the medium term:

Productivity gains will spread,
Services costs will fall,
Interest-rate dynamics will remain uncertain,
Structural bottlenecks will determine how much of the gain translates into real living standards.

The key point is this:

The first-order story is not collapse. It is adjustment under constraint.

The constraints — housing, energy, regulatory capacity — are largely domestic and largely policy-driven.

Those are where attention should be directed.

Up next: Second Order Effects