ECB's Lane: AI could weaken wage bargaining and push up long-term rates

Philip Lane, chief economist of the European Central Bank, said in a speech in Dublin on October 13 that the growing adoption of AI by euro-area companies could weaken workers' bargaining power over wages, curb pay growth and reduce the share of labor compensation in total income.

Lane noted that AI has not yet changed overall employment trends, but weak hiring intentions are making it harder for workers to secure pay rises that offset high inflation. He added that AI could replace some workers, further eroding their bargaining position.

He also said that heavy corporate borrowing to invest in AI is pushing up borrowing costs and tightening financing conditions globally. This effect has transmitted to euro-area bond markets, where higher long-term rates have significantly tightened financial conditions, a factor the ECB must consider when setting monetary policy.

With energy prices pushing euro-area inflation to nearly twice the ECB's 2% target, policymakers have been watching for second-round effects, though no clear signs have appeared. The ECB has previously raised rates to combat persistent inflation, and some economists believe that tighter financing conditions could reduce the need for further aggressive policy moves.

Lane added that AI could lift potential output and trend growth in the long run, potentially offsetting the impact of a declining working-age population in Europe.