The impact of digital innovation on labor share: Evidence from Chinese firms

Abstract

We use data from listed Chinese companies spanning the years 2000–2021 to study the impact of digital innovation on labor share. Our findings reveal a significant role of digital innovation in enhancing firms' labor share, which changes the factor allocation within firms. Mechanistic analysis reveals that digital innovation drives firm growth through innovation spillover effect, productivity enhancing effect, and expansion effect, with internal control costs and outward foreign direct investment acting as moderating factors. Further examination shows that the labor share-enhancing effect of digital innovation is more pronounced in firms with advanced technologies, greater market power, state ownership, and lower financing constraints. Additionally, we find that the relationship between digital innovation and labor share follows a phased pattern, exhibiting an inverted U-shaped trend over time.