Artificial intelligence and labor demand: An empirical analysis of Chinese small and micro enterprises

The widespread application of artificial intelligence (AI) technology has triggered a significant transformation in the economic structure and has brought profound changes to human society. As China promotes the digital transformation of industries, understanding how the investment in AI by small and micro enterprises (SMEs) affects labor demand, which is inextricably linked to "stable employment", becomes an important question. This paper uses special data from 127 SMEs in 14 provinces from 2016 to 2020 and employs a two-way fixed effects model to study the impact of AI inputs on enterprises' labor demand. The empirical results show that the impact of AI inputs on the labor demand of SMEs is not significant overall, but shows a significant negative effect in non-state-owned enterprises, private enterprises, and high-tech enterprises. There is a significant difference in the impact of AI inputs on the labor demand of different industries, with only the wholesale and retail industry demonstrating a significant positive impact. From the results of mechanism analysis, the substitution effect and creation effect of AI inputs on labor demand coexist, and in general, these two effects cancel each other out. However, the substitution effect dominates in some types of enterprises and industries. Finally, this paper discusses the government and enterprise coping strategies for the employment impact of AI applications based on empirical evidence and research results. This paper not only theoretically demonstrates that the impact of AI investment on firms' labor demand is uncertain, but also empirically demonstrates that Chinese firms' AI investment does not significantly affect firms' overall labor demand. This facilitates the government and enterprises to formulate strategies that can enhance the level of enterprise intelligence without impacting the labor market.