How Do Digital Skills Affect Rural Households’ Incomes in China? An Explanation Derived from Factor Allocation

Raising rural household income is central to narrowing the rural–urban gap and advancing common prosperity. Using data from the China Family Panel Studies (CFPS), this study examines the impact of digital skills, a key for human capital, on rural Chinese households’ income and uses a fixed-effects model and the instrumental variable method to address endogeneity. The study finds that digital skills raise total household income, and each additional skill is associated with an increase of CNY 1678. By skill type, online business skills have the largest effect, followed by work–study skills, while entertainment–social skills are negatively associated with income. Heterogeneity analyses indicate larger gains for households with lower educational attainment and lower income, showing that a stronger regional digital environment amplifies these effects. Mechanism tests point to factor reallocation toward the nonfarm sector, via higher probabilities of off-farm employment and entrepreneurship and improved access to formal credit, as the primary pathway. Consistent with these channels, digital skills increase wages and operating income and reduce inequality in these components, as well as benefitting total income, but they have no detectable effect on property or transfer income or their dispersion. These findings point to key implications for boosting rural income growth and reducing inequality, namely strengthening digital skill development and optimizing the digital environment to enhance rural households’ endogenous income-generating capacity.