The AI Layoff Trap Nobody Can Escape

A research paper from Penn and Boston University frames AI-driven mass layoffs as a prisoner's dilemma and tragedy of the commons. Each company rationally benefits from replacing workers with AI, capturing 100% of cost savings while spreading demand damage across competitors. When all companies do this simultaneously, consumer spending collapses and everyone loses. The paper evaluates six proposed solutions — UBI, profit taxes, worker equity, industry pacts, and retraining — finding only a Pigouvian tax (charging companies for the demand damage their layoffs cause) actually changes the underlying incentive math. A counterintuitive finding: as AI improves, the trap worsens because higher savings increase the incentive to fire more workers faster, a dynamic the authors call the Red Queen effect.