The Impact of Digitalization on Employment Risk in the Labor Market

Abstract

Enterprise digitalization, a microform of the digital economy, significantly impacts the labor market. Enterprises must consider not only changes in labor demand due to digitalization but also the associated labor costs. As labor costs increase, enterprises often reduce labor demand, creating employment risks. However, the effect of enterprise digitalization on labor decisions and employment risks amidst rising labor costs has not been fully explored.

Our theoretical framework posits that enterprise digitalization influences employment risks through two mechanisms and three effects: the substitution effect and scale effect of the productivity mechanism, and the financing effect of the resource mechanism. The substitution effect increases employment risks, while the scale and financing effects mitigate these risks. We begin by summarizing and expanding the lexicon of enterprise digitalization from prior studies, measuring enterprise digitalization using the word frequency method. Using labor demand elasticity as an entry point, we analyze Chinese A-share listed enterprises from 2010 to 2020 to examine the impact of enterprise digitalization on employment risk. Our findings indicate that enterprise digitalization reduces employment risk and has a net positive employment effect. These results remain robust through various tests, including the instrumental variable approach, alternative measurements of enterprise digitalization, and sub-sample regression. Furthermore, the empirical results of the mechanism test using the mediated moderation model show that the scale and financing effects are predominant and significantly impactful.

We contribute to the literature in several ways. First, we explore how enterprise digitalization affects employment risks in the context of rising labor costs, focusing on the economic consequences of digitalization in the labor market. Second, unlike prior research that mainly addresses the digital economy and employment from a theoretical or macro-regional perspective, we emphasize empirical support and the crucial role of enterprise digitalization in constructing the digital economy, examining the relationship between digitalization and employment risks from a micro perspective. Third, unlike technological advances such as robotics, enterprise digitalization not only enhances productivity but also drives innovation and business model transformation. Guided by Schumpeter’s theory of “creative destruction”, we develop a theoretical framework linking enterprise digitalization to employment risk.

Enterprise digitalization, driven by the digital economy, promotes enterprise development and improves operational conditions, positively impacting future labor market stability and the achievement of fuller, higher-quality employment. As labor prices and costs rise, deepening employment risks, the rapid development of the digital economy offers new strategies to alleviate these risks. Our findings suggest that enterprise digitalization can expand enterprise scale, reduce financing costs, and mitigate employment risks, aligning with the policy goal of “stabilizing employment”.