The effect of digital finance on wage inequality: Evidence from manufacturing firms in China

Abstract

Abstract Reducing wage gap is crucial to reducing income inequality and promoting economic growth. This study examines the impact of digital finance on wage inequality using national panel data of 273,635 manufacturing firms in China from 2011 to 2015. Findings show that digital finance increases wage inequality, with the highest positive effect observed for the depth of digital finance usage, followed by digital finance coverage, and the lowest effect seen for digitalization in inclusive finance. The robustness and endogeneity tests confirm these findings. Digital finance contributes to wage inequality by alleviating financing constraints. The effect of digital finance on wage inequality varies by firm size, age and ownership. Digital finance has a negative effect on disadvantaged groups in the financial market and exacerbates financial exclusion for small, new, and private firms, leading to wage inequality. Specifically, the positive effect of digital finance on wage inequality is stronger for large firms than for small and medium-sized (SMEs), and old firms than for new firms and foreign firms than for private firms. However, digital finance has no effect on wage inequality in state-owned enterprises (SOEs). This study provides evidence on how optimising digital finance can help narrow income inequality and promote economic growth. JEL classification: D82, O38, J31