AI-Augmented Capital-Skill Complementarity

André Victor Doherty Luduvice and Roberto Pinheiro

No 26-22, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We model artificial intelligence (AI) as a distinct capital input in a nested CES aggregate production function that extends work done by Krusell et al. (2000) and embed it in a dynamic general equilibrium economy. By bringing the model to the data, we estimate the degree to which AI either substitutes for or complements the other production inputs at the aggregate level. We find that AI is complementary to the high-skill–equipment composite and that the AI weight in production remains small. We then use the model to study how this complementarity shapes the macroeconomic and distributional effects of AI capital accumulation. The estimated model implies different effects of alternative AI shocks. A rise in the AI usage share is contractionary as it increases reliance on a scarce complementary input. A fall in AI prices is expansionary due to the lower cost of accumulating AI capital. A tax on AI capital income raises limited revenue while the AI capital stock remains small, but can finance welfare-improving transfers as the AI price falls. A large-scale universal basic income (UBI) funded jointly by a consumption tax slows AI investment with welfare gains for low-skill workers at the expense of losses for high-skill workers and entrepreneurs. On the measurement side, we construct a quality-adjusted AI price index from hedonic regressions and build a corresponding AI capital stock.

JEL-codes: E22 E25 J24 J31 (search for similar items in EconPapers)
Date: 2026-09-04
New Economics Papers: this item is included in nep-ain, nep-dge and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:103765

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DOI: 10.26509/frbc-wp-202622

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