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.
