Fed's Michael Barr warns AI could leave workers 'essentially unemployable' in 3 scenarios

Fed governor Barr: 3 ways AI could shake up the labor market

Why it matters: The path that unfolds will shape the future of employment, productivity and inflation trends. Each outcome comes with its own consequences -- and challenges -- for investment, the financial markets, and monetary policy. What they're saying: In a speech yesterday, Federal Reserve governor Michael Barr laid out three possible AI scenarios, a notable outline of how a top Fed official anticipates the technology could ultimately shape the labor market. 1. Gradually. The first scenario is perhaps the least economically painful. AI uptake is widespread but gradual enough that "large and widespread joblessness is avoided," consistent with earlier tech advances like the internet and personal computers. * "Unemployment might rise somewhat in the short term due to skill mismatch, but education and training choices adjust over time, and many workers successfully retrain and retain their jobs or find new ones," Barr said. * Barr noted that research seems most consistent with this scenario, though it doesn't mean that "more extreme scenarios" can't play out in the years ahead. 2. Rapidly. AI capabilities swarm the economy far more quickly than the labor market can adjust, leaving "a large share of the population ... essentially unemployable." * "AI-centric start-ups with radically new business models displace firms that are unable to adapt, and layoffs soar, leading to widespread unemployment in the short run and declines in labor force participation over time," Barr said. * This would be the realization of the gloomy AI economic consequences that Anthropic CEO Dario Amodei warned Axios about last year. Barr issued his own warning about how the government and private sector would need to be prepared to respond. * "With a vastly more productive economy, but much less demand for labor, society would have to rethink the social safety net to ensure that the gains from unprecedented economic growth are shared rather than concentrated among a small group of capital holders and AI superstars," Barr said. 3. To exhaustion. In Barr's final scenario, shortages -- of electricity supply, of financing capital, etc. -- lead to a stalling out of AI capabilities. "Timing mismatches in the investment and business integration process could lead to reduced realization of the potential of AI," he said. * AI could still be widely adopted in this case, but the tools are "ubiquitous, even indispensable, but not necessarily revolutionary by themselves." The big picture: A new survey -- conducted by economic researchers at the Bank of England, the Atlanta Fed and universities in Germany and Australia -- shows broad adoption of AI among international companies, but so far limited economic effects. * More than 90% of the 6,000 business managers in the four countries reported no AI-related employment impacts, while a similar share reported no changes to labor productivity, according to research published by the National Bureau of Economic Research. * But forward-looking surveys anticipate more impact over the next three years, with firms predicting that AI adoption will boost productivity by 1.4% on average, and reduce employment by almost 1%. The intrigue: San Francisco Fed president Mary Daly told Axios San Francisco's Shawna Chen that businesses are in a wait-and-see hiring mode as they assess AI capabilities. * "Right now, they're in this interrogation phase of, 'What is AI going to help us do and not do? And once we figure that out, then we can think about hiring," Daly said. The bottom line: "The extent of disruption will depend in part on whether society undertakes the investments needed in new job creation, worker training, connecting workers to new jobs, and other efforts to mitigate adverse labor market effects," Barr said.

AI doomsday where many workers are 'essentially unemployable' is totally possible, Fed governor says | Fortune

Federal Reserve Governor Michael S. Barr issued a stark warning on Tuesday regarding the potential trajectory of artificial intelligence, outlining a scenario where rapid technological advancement will create a "jobless boom" that leaves a significant portion of the population "essentially unemployable". Speaking before the New York Association for Business Economics on Feb. 17, Barr discussed the profound uncertainty surrounding how generative AI will reshape the labor market. While current data suggests a gradual integration of the technology, Barr urged policymakers not to underestimate the risks. "We should be clear-eyed about how painful these changes could be for affected workers and how challenging it would be for the government and the private sector to successfully manage the fallout". He laid out three scenarios for how AI will impact the labor market, noting that predictions range from "the utopian to the apocalyptic". The pace of technological change -- and the resulting debate -- is evolving quickly, though. In detailing what he termed a "scenario of rapid growth," Barr described a future where AI agents replace a wide range of professional and service occupations, while robotics automate manufacturing and transportation. In this version of the economy, labor demand would concentrate in a few highly skilled trades or roles requiring human interaction, while capital holders and "AI superstars" capture the lion's share of economic growth. "Layoffs soar, leading to widespread unemployment in the short run and declines in labor force participation over time, as a large share of the population is essentially unemployable," Barr said. He added that such a future would require, among other things, a complete rethinking of workforce development and the social safety net to prevent gains from being concentrated among a small elite. Barr cautioned that this dystopian outcome is just one of the three likely scenarios that he sees ahead. He emphasized that, so far, the economic data is more consistent with a "gradual adoption" scenario, akin to the integration of the internet or electricity. (Federal Reserve researchers theorized last year that AI would more closely resemble the light bulb than any other technology.) In this view, while some jobs are displaced, productivity gains eventually boost real wages and create new industries. However, Barr warned that early warning signs are already visible. He highlighted research showing that young people and early-career workers in AI-exposed fields -- such as software development and customer service -- are already seeing declines in employment relative to other sectors. (Fortune has termed this "the Gen Z hiring nightmare.") Barr noted, "for these workers, the short run may have long-term consequences," citing the persistent earnings damage caused by entering a weak labor market. The governor's comments come at a fragile moment for the U.S. economy. As of February 2026, inflation remains elevated at 3%, driven in part by tariffs, while job creation has been "near zero" over the course of the previous year. Barr described the current labor market as stabilizing but maintaining a "delicate balance" that is vulnerable to negative shocks. Goldman Sachs economists used nearly the same exact language a day earlier, as they projected that unemployment was holding steady despite weak job growth due to nearly 800,000 immigrants leaving the workforce in 2026. Given these conditions, Barr signaled that the Federal Reserve is unlikely to lower interest rates soon. He explained that if AI drives a productivity boom, it would increase demand for capital and investment, putting upward pressure on the "neutral" interest rate. Additionally, the massive infrastructure build-out required for AI -- including data centers and energy grids -- could prove inflationary in the short term. Barr also outlined a third "stalled growth" scenario, where energy shortages or a lack of training data cause the AI boom to bust, leading to financial stress comparable to the dot-com crash or the railroad panic of the 19th century. Regardless of which scenario plays out, Barr concluded that the private and public sectors are currently ill-equipped to handle the potential speed of the transition. He warned that the "historical record on meaningful efforts to help workers in such a transition is not encouraging". "Society will need to be nimble and bold to reduce the pain of short-term dislocations," Barr said. "Widespread AI adoption will very likely lead to dramatic and sometimes difficult changes in the way many of us work and live".

AI Is Already Taking Jobs From Young US Workers, Fed's Michael Barr Warns

Artificial intelligence may already be displacing some of America's youngest workers, according to Fed Governor Michael Barr. Speaking Tuesday at the New York Association for Business Economics, Barr said that AI it is beginning to weigh on entry-level employment in highly exposed occupations such as software development and customer service. Is AI Already Taking Jobs? Job creation has been near zero over the past year, labor force growth has stalled and the unemployment rate is hovering around levels many economists associate with long-run equilibrium. "But it is a delicate balance," Barr warned, noting that such conditions could leave the labor market "especially vulnerable to negative shocks." The most consequential part of Barr's speech was about the effects of artificial intelligence on the jobs market. Barr described generative AI as a likely "general-purpose technology," comparable to the steam engine, electricity or the personal computer. Such technologies tend to drive long-run productivity growth and higher living standards. But history also shows that transitions can be painful. Barr said research using ADP payroll data shows early-career workers in AI-exposed fields such as software development and customer service have seen employment decline relative to peers in less exposed occupations. He highlighted that entering a weak labor market can depress earnings for years. "For these workers, the short run may have long-term consequences," Barr warned. Barr's caution echoes findings from a recent exclusive Benzinga interview with Nico Palesch, senior economist at Oxford Economics. Palesch said up to 20% of the U.S. workforce could be highly exposed to robotics and automation over the next decade or two, particularly in transport, logistics and manufacturing. "The people losing their jobs aren't necessarily going to get new jobs," Palesch told Benzinga. What About Productivity Gains From AI? On productivity, one study cited by Barr estimates AI could add 0.3 to 0.9 percentage point to annual total factor productivity growth over the next decade. Speaking in comparable terms, that would rival late 1990s internet-driven gains. So far, AI adoption has moved fast. As of December 2025, 17% of businesses in the Census Business Trends and Outlook Survey report using AI. Among firms with more than 250 employees, about 30% report adoption. A McKinsey survey found 88% of mostly large firms use AI in at least one function. Generative AI use jumped from 33% in 2023 to 79% in 2025. Over the long run, Barr expects AI to boost productivity and living standards. But in the short term, he cautioned, "AI may deeply disrupt labor markets and harm some workers." He urged policymakers and society to begin preparing now. "In my judgement, now is the time for society to begin to consider how to address these potential disruptions, while AI adoption is in its early stages," Barr said. Image: Shutterstock Market News and Data brought to you by Benzinga APIs To add Benzinga News as your preferred source on Google, click here.