Digital transformation and labor upgrading

Prior literature shows that digitalization can reduce transaction costs and improve operating efficiency. However, the success of enterprise digitalization heavily depends on a variety of complementary human capital and employee capabilities. We focus on whether and to what extent enterprise digitalization affects employee upgrading, and whether digitalization is more valuable in firms where digitalization matches with human capital. Our analysis measures employee upgrading using detailed employee-level data (i.e., experience and education) and matches these data to metrics on enterprise digitalization to determine whether a firm's digitalization facilitates employee upgrading. Using the data of A-share listed companies from two Chinese exchanges between 2007 and 2020, we find that firms that undergo digital transformation have a greater demand for more highly technologically skilled and highly educated employees but experience a decrease in the demand for production workers. We also find that digitalization helps firms to create new demand for more skilled and higher educated labor and the re-training of existing manufacturing workers. Furthermore, we find that firms that undergo digital transformation receive higher value benefits from their complementary relationship between enterprise digitalization and labor skills, indicating that digitalization can increase firm value through upgrading their employees' labor skills. These results shed light on the fact that firms aiming to digitally transform successfully not only need to have digital assets but also must develop or acquire human capabilities related to digital technologies.