Artificial Intelligence and income inequality in Ireland

Artificial intelligence (AI) is advancing quickly and is beginning to reshape the kinds of work people do, how incomes are earned, and the balance between labour and capital in modern economies. For Ireland, a country with a highly educated workforce and a strong technology sector, AI adoption presents a unique challenge and opportunity. This report explores what AI adoption could mean for Irish households, for the distribution of income, and for public finances over the short- to medium-term. Using evidence from international research, we simulate a range of plausible scenarios for AI adoption and its effect on employment, wages and capital income. Linking these scenarios to the Irish tax-benefit system using SWITCH, the ESRI’s microsimulation model, we investigate the potential distributional effects of AI adoption in Ireland. Unlike previous waves of technological change, AI tends to place higher earning and highly educated workers at greater risk of disruption, because the occupations most exposed to AI are predominantly in these groups. In our central scenario – drawn from credible international estimates – around 7 per cent of current jobs could be displaced in the short–medium run. Those most likely to experience this disruption are found in higher income households, where the share of workers transitioning into unemployment is substantially larger than in lower income families. For those who remain in work, AI is expected to increase productivity. We estimate that workers who are not displaced may see modest but broadly shared wage gains. These gains are not large enough to counterbalance the average fall in income due to job displacement. Increases in returns to capital as a result of AI adoption, while modest in percentage terms, benefit households at the very top of the income distribution, where the vast majority of Ireland’s capital income is concentrated. When these effects are combined, we find an average decline in household disposable income as a result of AI adoption. The largest average losses are experienced by middle and higher income households, for whom job displacement outweighs any wage or capital income gains. Lower income households also lose, but by much less. Ireland’s tax and welfare system absorbs most of the income loss for lower income households, and roughly half of the loss for households at the top of the income distribution. Income inequality, measured by the Gini index, rises moderately in every scenario we examine due to the polarising effect of job losses and wage and capital income increases on the income distribution. The implications for the public finances are also substantial. If employment losses are relatively small and productivity gains are realised, AI adoption could boost Exchequer revenues. But if job displacement is sizeable, tax receipts fall while welfare spending rises, resulting in potentially large pressures on the public finances. These findings underline the importance of forward-looking policy. AI has the potential to increase productivity and living standards, but only if the workforce is equipped with the skills needed to use it effectively or to transition into roles that are less exposed. Ireland’s high levels of educational attainment offer a strong foundation, but targeted educational support will be essential, particularly for older workers or those with lower formal qualifications. Investment in lifelong learning, retraining and programmes that help workers shift into AI-complementary or currently under-supplied occupations will be crucial. Beyond the labour market, our analysis highlights the need to consider the future resilience of Ireland’s tax base. If AI accelerates the shift from labour income to capital income, the current heavy reliance on labour taxation may become increasingly difficult to sustain. Broadening the tax base and strengthening taxation of wealth and capital may become necessary to ensure the long-term stability of public services and welfare supports. Although the long-term effects of AI remain uncertain, Ireland is well placed to benefit from the opportunities it brings – but only if the risks are managed carefully. AI adoption will create winners and losers, at least in the short to medium term. Policymakers will need to steer this transition in a way that supports displaced workers, protects the living standards of vulnerable households and ensures that the gains from AI contribute to inclusive and sustainable economic growth.