Yunchou (Andrew) Zhang

Abstract

AI is changing workplaces: it leads to higher individual productivity and faster learning. We model the effects of these changes on internal labor markets. We show that for productivity shocks, firms preserve the span of control in the long run: a pyramid remains a pyramid. In the short run, however, firms freeze junior hiring, temporarily transforming the pyramid toward a diamond. In the transition to the new steady state, firms may oscillate between pyramids and diamonds before settling. For learning shocks, the long-run span of control falls, potentially permanently shifting the firm from a pyramid to a diamond. These fluctuations create inequality between junior cohorts and affect firm value when human capital is firm-specific.