Does digital transformation increase the labor income share? From a perspective of resources reallocation

Digital technology has led to a new wave of industrial revolution, affecting resource reallocation, especially labor employment and income. While extant studies have primarily focused on the influence of digital transformation on firm performance, little attention has been paid to its impact on labor income. This study establishes a theoretical model to analyze the relationship between digital transformation and labor income, using a large panel dataset comprising China's listed firms in 2005-20 for empirical test. The theoretical framework integrates digital transformation as an expanded technology of labor and capital into a firm-level production function. The empirical results show that digital transformation has a significant substitution effect on labor, leading to a contraction in its income share. This effect is particularly pronounced in the western region and manufacturing sector. This study suggests that governments at all levels should pay attention to workers' welfare when firms implement digital transformation to improve productivity.