  How does Artificial Intelligence (AI) affect the organization of work and the
structure of wages? We study this question in a model where heterogeneous
agents in terms of knowledge--humans and machines--endogenously sort into
hierarchical teams: Less knowledgeable agents become "workers" (i.e., execute
routine tasks), while more knowledgeable agents become "managers" (i.e.,
specialize in problem solving). When AI's knowledge is equivalent to that of a
pre-AI worker, AI displaces humans from routine work into managerial work
compared to the pre-AI outcome. In contrast, when AI's knowledge is that of a
pre-AI manager, it shifts humans from managerial work to routine work. AI
increases total human labor income, but it necessarily creates winners and
losers: When AI's knowledge is low, only the most knowledgeable humans
experience income gains. In contrast, when AI's knowledge is high, both
extremes of the knowledge distribution benefit. In any case, the introduction
of AI harms the middle class.

Theoretical Economics