That changes nothing about diminishing returns here.
Expanding into a market doesn’t dramatically increase the demand for products in that market. If Tesla started to make Hybrids they could sell more cars and employ more people, but other companies would experience fewer sales and thus cut back on staff.
Competition is great for overall productivity, but the gains aren’t magically spread evenly across the economy.
> expanding markets and increasing demands for labor.
Many industries like banking, mining, and farming have drastically cut back on labor. When the majority of those lost jobs were low skilled the productivity benefits allowed more high skilled labor to be employed. But specifically cut high skill labor and new jobs are less likely to also be high skill.
If you accept that AI as we know it is a tool (and not a wholesale replacement for human beings) then it will follow the same trend of any other productivity tool of expanding markets and increasing demands for labor.