AI-Absorbing Innovation

An unstudied avenue by which AI impacts employment and economic growth is through the assimilation of artificial intelligence (AI) into non-technology innovation. Using patent citations to identify instances where non-IT patents incorporate AI knowledge, we document an increasing dominant U.S. market share in AI-absorbing innovation and an excess market valuation. Our primary goal is to study the implications of AI-absorbing innovation for employment and its firm mechanisms. Using Jorda (2005) projections, Sun and Abraham (2021) estimators, and instrumented methods using laboratory (federal and university) AI, we find that AI-absorbing innovation increases employment. Isolating the mechanism, firms engaging in AI-absorbing innovation display faster growth in output as well as the profits and needed capital associated with the revenue growth. We find that the positive effects of AI-absorbing innovation are not primarily through automation. Rather output growth is driven by both AI-absorbing product innovation and AI-absorbing process innovation, reflecting channels identified in Babina et al (2024), but with a very different AI role.