The dual effects of digitization: An enterprise perspective

Using data of World Bank China-Enterprise Survey, this paper constructs a comprehensive index of firm-level digitization based on indicators such as email adoption, website presence, the percentage of the workforce using computers, and the extent to which ICT (computers, the Internet and software) is used to support partner relations to reveal the potential impact of digitization on labor productivity and labor share. The results of eliminating endogeneity show that: the use of digital technology has significantly improved labor productivity and reduced the labor income share. For every one-unit increase in digitalization, labor productivity increases by approximately 18.03 %, while labor income share decreases by 10.94 %. The mechanism analysis shows that the positive relationship between digital adoption and labor productivity per capita is not based on a shrinking denominator, and that digitization promotes employment rather than displacing labor; digitization brings about wage increases while promoting a greater increase in labor productivity, which ultimately leads to a decrease in the labor income share; digitization, by polarizing low-skilled workers, such as temporary workers and seasonal workers, has contributed to the higher productivity of enterprises while making the wages of low-skilled workers decrease, which ultimately leads to a decrease in the labor income share. The increase in labor productivity due to digitization is more pronounced in firms without state ownership and firms in the East, and the negative effect of digitization on the labor income share is stronger in firms without state ownership than in firms with state ownership; the impact of digitization on labor productivity partly channels through a reduction in the labor share, however, this indirect effect appears quite small.