AI’s Labor Cost-Cutting Potential
Written by Chad Roope, CFA ®
Chief Investment Officer
Artificial Intelligence (AI) is transforming our lives and economy in many fundamental ways. AI, and technology overall, are increasingly being deployed to reduce costs and increase productivity, not just to build new products. In this month’s Investment Spotlight, we are highlighting a major component that may be less obvious but highly important in investing: increased corporate profitability through cost-cutting.
Commentary from leading companies in 2025 centered around leveraging AI and automation to manage costs to increase profitability. Ric Reider at BlackRock has attempted to quantify the potential impact in dollar terms by examining labor costs alone. According to his research, the numbers could be enormous. Below is an excerpt from the research he recently published1:
“Today, labor accounts for roughly 55% of total business-sector costs. If AI and related technologies can reduce labor’s share of corporate costs by even 5% — from 55% to 50% — and if 75% of those savings accrue to corporates and 25% to AI service providers, the present value of those cash flows is enormous. On aggregate, that would generate roughly $1.2 trillion in annual labor cost savings, translating into about $878 billion in incremental after-tax corporate profits each year. The present value of the corporate piece alone is on the order of $82 trillion, with another $27 trillion accruing to AI providers.
For perspective, that $110 trillion combined present value doesn’t come from new revenue lines. It comes from shifting cost structures, with labor as the obvious loser. Mechanically, a 9% reduction in labor costs translates into roughly 31% higher earnings for corporates. The market doesn’t need every sector to experience that magnitude of change for the equity and credit implications to be significant.”
We think these numbers highlight some reasons why financial markets have been doing so well the last few years. Markets are forward-looking and have been anticipating such benefits. We think markets have priced a fair amount of these benefits for the “AI service providers” Reider references, but we think there is still plenty of runway left for corporate America more broadly, especially in industries where labor costs account for a high percentage of total costs.
This is a theme we will be monitoring closely. Obviously, reducing labor means less job growth, but perhaps this will be offset by better-paying jobs in aggregate. Overall, we see opportunity in stocks outside of the usual AI players in 2026, given potentially improved profit margins through cost-cutting.
1: BlackRock, Jan. 2, 2026, "The Odds Are Changing: Investing in 2026"
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