Job Destruction or Job Creation? Impact of Digitalization on Unemployment

This study contributes to the ongoing discourse on the transformative effects of digitalization on labor market by exploring its dual impact in both job creation and destruction. Using a two-way fixed effects model and panel data from 224 cities in China between 2003 and 2019, we empirically test three potential relationships between digitalization and unemployment: positive linear, negative linear, and non-linear trajectories like U-shaped and inverted U-shaped patterns. Our results show that (i) each unit increase in digitalization corresponds to a 0.136% decrease in the unemployment rate, a finding that remains robust after a serious of robustness check and addressing endogeneity through instrumental variable (IV) estimation; and (ii) mediation analysis using structural equation modeling (SEM) identifies industrial upgrading and entrepreneurship as key channels through which digitalization mitigates unemployment. This study makes several theoretical contributions. First, it provides valuable insights into how digitalization shapes labor market outcomes and enhances our sociological understanding of how technological change interacts with and reshapes economic activities and structures, enriching existing theories on the varied effects of technological advancement on labor markets, particularly its long-term role in fostering job creation. Second, it highlights the proactive role of government in promoting digitalization, suggesting that technological change primarily driven by state-led initiatives has the potential to reduce inequality and foster more inclusive development compared to market forces. Finally, this study offers broader developmental implications for regions that are undergoing similar transition. China's trajectory—initially lagging in digital development until 2010, then catching up to the global frontier offer wide range and valuable implications for how digitalization can be leveraged for better development in other developing regions such as Africa and South Asia. Our findings highlight the significant potential of digitalization to mitigate unemployment, thereby addressing broader inequalities and promoting a more equitable society in the long run.