Slowed by digitalization or by lack of absorptive capacity? Explaining local employment responses to digitalization

Source abstract

Digitalization is expected to transform labour markets, yet its employment effects remain contested. While some studies report job displacement, others emphasize productivity gains and employment creation. An increasingly important question is why similar digital shocks generate different outcomes across places. Using data for 494 Spanish Local Production Systems between 2011 and 2021, we find that greater exposure to digitalization is associated with slower growth in the employment-to-population ratio. However, the results show that the employment effects of digitalization depend critically on local absorptive capacity. The negative effect of digitalization on employment is concentrated in places with lower levels of tertiary education and become weaker as human capital increases. Beyond a critical threshold, the negative effect disappears. We also observe that emerging digital technologies have a stronger adverse employment effect and require higher levels of local absorptive capacity than more traditional forms of digitalization. The results suggest that places do not suffer from being exposed to digitalization per se, but from lacking the capabilities needed to absorb and adapt to technological changes.