Companies can get trapped in an 'automation arms race' that kills the customer demand they need to stay alive.
March 24, 2026
Original Paper
The AI Layoff Trap
arXiv · 2603.20617
The Takeaway
It challenges the assumption that companies will naturally stop automating if it hurts the broader economy. The model shows that individual firms are forced by competition to replace workers even when they know it will collectively destroy their own customer base and lead to a market death spiral.
From the abstract
If AI displaces human workers faster than the economy can reabsorb them, it risks eroding the very consumer demand firms depend on. We show that knowing this is not enough for firms to stop it. In a competitive task-based model, demand externalities trap rational firms in an automation arms race, displacing workers well beyond what is collectively optimal. The resulting loss harms both workers and firm owners. More competition and "better" AI amplify the excess; wage adjustments and free entry c