Payrolls to Prompts: Firm-Level Evidence on the Substitution of Labor for AI
Ryan Stevens
TL;DR
The paper investigates whether firms substitute contracted online labor with generative AI, using Ramp expense data from 2021–2025 and treating the October 2022 ChatGPT release as a natural experiment. Employing a difference-in-differences framework with firm and quarter fixed effects and exposure-based quartiles, it documents substantial, time-varying substitution that is stronger among firms with higher pre-existing online-labor exposure. The findings show a measurable shift in spending from online labor marketplaces toward AI model providers, accompanied by cost savings estimates (e.g., higher-exposure firms exhibit a nontrivial AI spending increase for each dollar of labor reduced). These results offer micro-level evidence that generative AI substitutes for part of outsourced labor in production, with heterogeneity driven by initial exposure, and they highlight the importance of firm-level dynamics for understanding AI's labor-market implications.
Abstract
Generative AI has the potential to transform how firms produce output. Yet, credible evidence on how AI is actually substituting for human labor remains limited. In this paper, we study firm-level substitution between contracted online labor and generative AI using payments data from a large U.S. expense management platform. We track quarterly spending from Q3 2021 to Q3 2025 on online labor marketplaces (such as Upwork and Fiverr) and leading AI model providers. To identify causal effects, we exploit the October 2022 release of ChatGPT as a common adoption shock and estimate a difference-in-differences model. We provide a novel measure of exposure based on the share of spending at online labor marketplaces prior to the shock. Firms with greater exposure to online labor adopt AI earlier and more intensively following the shock, while simultaneously reducing spending on contracted labor. By Q3 2025, firms in the highest exposure quartile increase their share of spending on AI model providers by 0.8 percentage points relative to the lowest exposure quartile, alongside significant declines in labor marketplace spending. Combining these responses yields a direct estimate of substitution: among the most exposed firms, a \$1 decline in online labor spending is associated with approximately \$0.03 of additional AI spending, implying order-of-magnitude cost savings from replacing outsourced tasks with AI services. These effects are heterogeneous across firms and emerge gradually over time. Taken together, our results provide the first direct, micro-level evidence that generative AI is being used as a partial substitute for human labor in production.