The acceleration and attenuation: Internet infrastructure and employment adjustment patterns

How does the arrival of broadband Internet affect firms’ employment adjustment patterns? Understanding this relationship is crucial, particularly given the challenges of employment recovery following major economic shocks such as the global financial crisis and the COVID-19 pandemic. We examine this question using China’s broadband infrastructure expansion in the early 2000s. Using establishment-level data, we find that Internet access increases employment adjustment rates, reduces the probability of inaction, and increases the likelihood of smooth adjustments. Internet access also alters the distribution of adjustment types: firms transition more quickly from spike to smooth adjustments, while maintaining smooth adjustment periods longer before reverting to inaction. By alleviating search frictions, lowering fixed hiring costs, and reducing firm-level uncertainty, these shifts in adjustment patterns improve firms’ responsiveness to economic shocks: cities with better Internet infrastructure show stronger employment responses to positive demand shocks from WTO and faster recovery from the 2008-09 crisis. The changes in distribution of adjustment types not only promote employment growth but also generate significant efficiency gains: micro-level improvements explain 44 percent of the reduction in firm-level labor misallocation, while cities with better digital infrastructure exhibit lower dispersion in labor’s marginal product, though the magnitude depends on local labor mobility institutions.