The Entry-Level Anxiety: From Code to Capital
At the university I teach, many of my students are worried about AI worsening their job prospects. Many of them hope to work in entry-level roles in financial firms. And they are worried that AI will make those roles obsolete.
It is a similar story for young people hoping to become software engineers or lawyers. Suppose AI can write code, analyze a firm’s financials, and draft legal agreements. Then do businesses still need entry-level analysts?
Suppose AI turns out to be competent at these tasks. How does this affect employment in these industries?
One scenario is that firms hire fewer people and replace tasks with AI. Their overall business doesn’t grow much. It becomes more difficult to secure an entry-level job. This is the pessimistic scenario.
Scaling vs. Replacing: The Two Paths for AI in Finance
There’s another more optimistic scenario. And in this world, industries use AI primarily to grow their businesses, rather than to replace workers. Imagine a financial advisory firm. In this firm, each advisor manages 50 clients. Now suppose AI allows each advisor to manage 100 clients. What happens in the pessimistic scenario? The firm cuts the numbers of workers in half and manages the same total number of clients.
What happens in the optimistic scenario? The firm retains all its employees and doubles the number of clients. They choose to grow their business. This works because financial advice becomes cheaper for clients. Each client now uses half of the advisor’s time they previously used, so the advisor can charge them less.
If the financial advice becomes sufficiently cheap, the potential growth is enormous. Most individuals don’t currently have access to personalized financial advice. The same is true for legal advice. If AI allows these types of firms to grow, it could increase employment in these industries due to the higher volume of customers.
Both these outcomes should be considered as extreme cases. The reality is that some combination of the two is inevitable. Firms will use AI to replace jobs. The same firms will also use AI to grow their business. But which of these effects will dominate remains uncertain.
Historical Precedence: Why Technology Creates New Demands
The history of new technology tells us that there is going to be some displacement and pain. So, for some of us, yes, AI will take our jobs. And for many of us, AI will change how we do our jobs.
The good news is that there will be other jobs to do. Despite all the technological progress of the last one hundred years, unemployment rates are low. In fact, most economic progress is the result of machines doing things that people once did.
For example, clothes made in garment factories have largely replaced individually tailored items. The result is that new clothes are much more affordable. If we take a long-term perspective, the optimistic scenario is the one that will occur. Financial and legal advice will be much cheaper and more accessible.
The Productivity Caveat: Is AI Ready for the Real World?
Of course, this all hinges on AI being productive. For all the hype, we don’t know yet what AI’s true capability is.
Disclaimer:
Note: The purpose of this article is to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly encouraged to consult your advisor. This article is for strictly educative purposes only.
Asad Dossani is an assistant professor of finance at Colorado State University. His research covers derivatives, forecasting, monetary policy, currencies, and commodities. He has a PhD in Economics. He has previously worked as a research analyst at Equitymaster, and as a financial analyst at Deutsche Bank.