How does the Digital Economy Affect Inter-city Labor Market Segmentation: “Deepen Divides” or “Bridge Gaps”?

Abstract

The digital economy’s rapid expansion is fundamentally transforming contemporary life, presenting both challenges and opportunities for labor market segmentation. While digital technologies have dismantled geographical and informational barriers, enhanced skill matching, strengthened labor protections, and reduced the social and temporal costs of workforce mobility, they simultaneously demand higher skill levels from workers. Whether the digital economy ultimately serves to “deepen divides” or “bridge gaps” in inter-city labor markets remains an empirical question requiring thorough investigation. Notably, there exists a significant research gap regarding the digital economy’s impact on labor market segmentation at the city level.

This study utilizes panel data from 270 Chinese cities spanning the years 2011 to 2019, employing price methodology and entropy weight techniques to quantify urban labor market segmentation and digital economic development. We propose two primary mechanisms through which the digital economy influences labor market segmentation: by reducing mobility costs and enhancing income opportunities for mobile workers. Our findings demonstrate that digital economic development significantly mitigates inter-city labor market segmentation, primarily by optimizing market matching efficiency, thereby reducing mobility costs and improving the benefits of labor flow. Heterogeneity analysis reveals that the digital economy’s contribution to a unified labor market is particularly pronounced in breaking down barriers to labor mobility in inland remote areas and economically disadvantaged cities. Further analysis indicates that enhanced industrial agglomeration and urban innovation facilitate the digital economy’s capacity to bridge gaps in the labor market.

Our research highlights several critical policy implications. First, policymakers should promote deeper integration between the digital economy and labor markets to overcome segmentation by developing digital job-matching platforms, enhancing workers’ digital capabilities, and ensuring equitable access to digital infrastructure across regions. Second, strengthening labor protections and skill development initiatives under the digital economy framework is essential, alongside establishing an open and inclusive labor market policy system that provides comprehensive social protection and public services for migrant workers. Finally, fostering industrial agglomeration and urban innovation is crucial for maximizing the digital economy’s benefits, as cities with robust industrial foundations and innovative capacities are better positioned to leverage digital technologies for improved labor market efficiency and reduced segmentation. Implementation of these policies would enable city governments to harness the digital economy’s dividends, creating more unified and dynamic labor markets that contribute to sustainable economic growth and social equity.

This paper makes three primary contributions to existing literature: First, it advances research on the digital economy’s impact on unified national markets to the factor and city levels, aligning with current national market unification objectives. Second, it employs the price method to measure inter-city labor market segmentation in China, combining meso- and micro-level databases for a scientifically rigorous and data-rich analysis. Third, it offers practical recommendations from both supply and demand perspectives on utilizing the digital economy to overcome inter-city labor market divisions, facilitate cross-regional factor mobility, and build a unified national market.