SDG 4: Quality Education | SDG 8: Decent Work and Economic Growth
Ministry of Finance | Ministry of Skill Development and Entrepreneurship
The International Monetary Fund (IMF) has released a staff discussion note titled “Bridging Skill Gaps for the Future: New Jobs Creation in the AI Age,” detailing how the emergence of new skills is fundamentally reshaping global labor markets. The report reveals that roughly 1 in 10 job vacancies in advanced economies now demands at least one new skill—abilities that were virtually non-existent a decade ago—while the incidence in emerging markets is approximately half that rate. These new skills are heavily concentrated in professional, technical, and managerial occupations, with Information Technology (IT) competencies accounting for over 50% of the demand.
Economic Impact and Labor Market Polarization
Wage Premiums: Vacancies listing new skills are associated with 3–3.4% higher wage offers in advanced markets, with the premium rising significantly when multiple new skills are required.
Job Polarization: While new skills boost average wages and employment, they primarily benefit high-skilled and low-skilled workers (through service consumption), potentially contributing to the shrinking of the middle class.
AI-Specific Displacement: In regions with high demand for AI-related skills, employment in occupations highly exposed to AI but with low complementarity (e.g., routine white-collar tasks) is 3.6% lower after five years, posing a specific challenge for the youth.
The Baumol Effect: This historical pattern—where high-productivity gains in sectors like IT can decrease employment even as output rises—may be re-emerging as AI automates tasks for software developers and web designers.
Firm Dynamics and Global Skill Diffusion
Leading Firms: The demand for new skills is driven by firms that are typically larger, younger, more innovative, and less financially constrained.
“Acquire-Hire” Strategy: Intense competition for scarce AI talent has fueled a wave of talent-driven mergers and acquisitions, raising concerns about market concentration and the restricted diffusion of skills.
Geographic Spread: New skills generally appear first in the United States before diffusing to other countries; however, diffusion is accelerating, with lags for emerging markets like Brazil and South Africa averaging about 8 to 9 months.
What is the ‘Baumol Effect’ in the context of the AI revolution? It is a productivity dynamic where sectors that achieve strong gains through automation and labor replacement (like IT services) see a decrease in employment even if their output rises. This forces workers toward slower-growing, more labor-intensive sectors, such as personal services, which do not benefit as much from technological advances. In the current AI era, many tasks performed by software developers and web designers are becoming highly productive through AI, potentially pushing technical talent into other sectors and reshaping the traditional career ladder.
Policy Relevance
The report serves as a strategic warning for policymakers to proactively manage the “skill churn” to ensure that the AI transition fosters inclusive growth rather than deepening regional and economic divides.
Strategic Impact for India:
Navigating the Youth Employment Gap: As India has one of the largest youth populations, the lower entry-level hiring in AI-exposed sectors requires urgent scaling of apprenticeships and internship programs to prevent long-term scarring.
Bridging the Digital Infrastructure Divide: The report’s Skill Readiness Index highlights that readiness depends on comprehensive education systems; India must prioritize integrating IT skills across all disciplines, not just STEM, to maximize workforce adaptability.
Formalizing the Workforce: Leveraging digital public infrastructure (DPI) can facilitate the formalization of India’s large informal sector, allowing these workers to better supply and benefit from the demand-induced gains of new technologies.
Managing Market Concentration: Indian competition authorities may need to monitor “acqui-hiring” trends in the domestic fintech and edtech sectors to ensure that specialized skills are not sequestered by a few dominant players.
Follow the full report here: Bridging Skill Gaps for the Future: New Jobs Creation in the AI Age