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AI Innovation and the Labour Share: Navigating the Productivity Puzzle in European Regions

FRANCESCO VENTURINI

As artificial intelligence (AI) continues to transform industries across Europe, its impact on labour markets and productivity is becoming harder to ignore. New research published in the European Economic Review, titled “AI Innovation and the Labour Share in European Regions”, co-authored with Antonio Minniti and Klaus Prettner, offers fresh insights into how technological advances in AI are reshaping the balance between capital and labour income across the continent.

What Is the Labour Share, and Why Does It Matter?

The labour share measures the proportion of national income paid to workers through wages and benefits. For much of the 20th century, this share remained relatively stable across advanced economies. In recent decades, however, it has been in decline in most areas of the world – a trend that raises concerns about growing income inequality and the fair distribution of economic progress.

AI’s Mixed Effects on the Workforce

AI presents a paradox. On one hand, AI adoption, which reflects firm investment decisions, boosts productivity and economic growth. On the other , it automates tasks, especially routine and manual work, often displacing workers and weakening their share of income. Meanwhile, AI innovation—the development of these new technologies—also influences how income is distributed between capital owners and workers, and among workers themselves, especially between highly and less-educated employees. The study finds that AI innovation tends to reduce the labour share primarily by compressing wages—a trend that, for medium- and high-skilled workers, is not offset by improved employment opportunities.

A Patchwork of Regional Experiences

Although the impact of AI innovation on factor income distribution has so far been quantitatively modest, its effects vary significantly across European regions. Areas with strong digital infrastructure, early specialisation in ICT fields, and high levels of R&D investment are transitioning more rapidly into new digital domains – reaping the benefits of increased output, but also facing the downside of greater income polarisation. In contrast, less developed regions may experience fewer immediate disruptions, at least in the short term.

Lessons for the UK’s Productivity Challenge

The UK has long struggled with sluggish productivity growth. According to the Office for National Statistics, output per hour worked in Q4 2024 was just 1.6% higher than pre-pandemic levels -a modest increase by international standards. At the same time, the UK is among the European countries most actively engaged in the transition to new digital technologies, which also makes it more exposed to the transformative -and potentially disruptive- effects of this shift. AI holds promise as a catalyst for renewed growth, but without strategic planning and inclusive policies, its benefits risk exacerbating existing inequalities across both individuals and regions

Looking Ahead

AI has the potential to drive the next era of economic growth, but whether it delivers broad-based prosperity or increased polarisation depends on the decisions we make today. As European data shows, innovation alone doesn’t guarantee inclusive progress. The challenge lies in designing a framework where technology and society move forward together.

For the UK, this means making smart investments in people, infrastructure, and policy – ensuring that as we embrace AI, we also uphold the values of fairness and opportunity. The long-term health of the economy depends not just on how fast we innovate, but on how well we share the rewards.


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