Bilateral Effects of the Digital Economy on Manufacturing Employment: Substitution Effect or Creation Effect?

Abstract

Understanding the substitution effect and creation effect of digital transformation on the manufacturing industry is crucial to safeguarding employment stability and advancing manufacturing sophistication in China’s contemporary context. In this study, a bilateral stochastic frontier model is used to examine the aforementioned effects drawing on provincial panel data of China spanning 2011 to 2020. The study reveals that: Firstly, the substitution effect of digital economy development on manufacturing employment outweighs the creation effect, culminating in a 7.80% decrease below the frontier benchmark, contrasted by a 4.15% increase attributed to the creation effect. The two effects possess an inverse relationship, collectively inducing a 3.66% decline in manufacturing employment as compared to the frontier. Secondly, the prevailing influence of the digital economy upon manufacturing employment is predominantly characterized by the substitution effect. However, projected medium to long term trajectories intimate a diminishing potency of this substitution effect and the creation effect will become more pronounced. Thirdly, in terms of geographical areas, the weakening of the employment-substitution effect due to the digital economy is most evident in the central region, followed by the western, and then the eastern regions. Conclusively, the impact of the digital economy on manufacturing employment exhibits variances contingent upon distinct economic maturation and disparate human capital stratification.