Principal investigator: Bruno Benevit
Authors: Alan Finkelstein Shapiro and Federico S. Mandelman
Original title: Digital adoption, automation, and labor markets in developing countries
Location of the Intervention: Pais in desenvolvimento
Sample Size: 134 countries
Sector: Labor Economics
Primary Variable of Interest: Self-employment rate
Type of Intervention: Digitalisation
Methodology: OLS, Structural Model
Summary
Digitization has the potential to induce automation in production processes. This phenomenon can affect returns and market structures in developing countries. In this sense, this study analyzed the relationship between the adoption of digital tools and employment modalities using data from several developing countries and presenting a structural model. The results revealed a strong negative relationship between digital adoption and rates of self-employment, even after controlling for factors such as level of development. No significant links were identified with unemployment rates. Additionally, the results of the structural model revealed that the costs of technological adoption and the entry of salaried businesses are fundamental to explaining this relationship.
- Policy Problem
Companies are incorporating digital technologies that drive automation and transform production processes. The implementation of computerized systems and modern equipment replaces manual tasks, altering the internal organization and the way activities are performed. This change affects the very structure of jobs by revisiting the functions and skills required of professionals. The increased use of digital technologies allows for the optimization of operations and the reduction of operational costs, which is reflected in adjustments to production methods and the distribution of roles played by workers in the corporate environment.
The advancement of digitalization and automation is generating a reconfiguration in the labor market. With the adoption of new technologies, there is a trend of workers shifting from self-employment to formal employment with companies. The modernization of processes facilitates the creation of organized businesses and the formalization of companies, while simultaneously reducing barriers to market entry. This dynamic alters hiring patterns, requiring professionals to update their skills and develop competencies adapted to new operational models that increasingly rely on the intensive use of digital resources.
In developing countries, there is evidence that the adoption of digital technology by companies is associated with a significant decrease in self-employment rates, while simultaneously favoring the emergence of formal businesses (Shapiro and Mandelman, 2021). In these contexts, where self-employment represents a significant portion of the workforce, the implementation of digital technologies can contribute to market restructuring and encourage the creation of firms with more organized processes. This relationship reinforces the importance of deepening the understanding of the impacts of digital transformation, enabling the identification of adjustments in the configuration of professional opportunities and labor patterns.
- Digitization in the context of developing countries
To understand the landscape of digitization, the authors considered data from World Bank World Development Report 2016 to observe patterns between digital adoption and trends in the labor market. Specifically, data from the index were observed. Business Digital Adoption Index (BDAI) from 180 countries in 2014 and 2016, which integrates measures relating to the number of secure servers, download speed, 3G coverage and the existence of company websites. Additionally, the following was considered Government Digital Adoption Index (GDAI) to observe government digitization. These metrics reveal the degree of incorporation of digital technologies in organizations and allow measuring the intensity of digitization in the private sector.
Although it does not provide qualitative information about the type of technology adopted, the BDAI provides a proxy To understand the phenomenon of digitalization in the labor market, a positive and significant correlation of 0,56 was observed when comparing the BDAI metric with the GDAI. Regarding the correlation with the costs of creating new firms, a significant relationship in the opposite direction of -0,39 was found. Both relationships suggest that digital adoption by the government has a positive association with digital adoption by companies, contributing to the reduction of barriers to entry for new firms.
Additionally, the study also checked the relationship between the 2016 BDAI index for developing countries with the following variables: (i) the cost of starting a business;
(ii) the density of new businesses; (iii) the rate of self-employment; and (iv) the unemployment rate. In general, the following stylized facts were observed:
- A strong and significant negative correlation exists between digital adoption by businesses and the cost of starting a business.
- A strong and significant positive relationship exists between digital adoption by companies and the density of new salaried firms;
- A strong and significant negative correlation exists between digital adoption by companies and the rate of self-employment.
- A moderate, but statistically weak, positive correlation exists between digital adoption by businesses and the unemployment rate.
- The relationship between digitalization and employment.
To assess how digital adoption by companies is linked to employment, the authors analyzed how the BDAI index relates to unemployment and self-employment rates. To this end, this relationship was estimated using ordinary least squares (OLS) models, considering various variables that can influence this dynamic. The analysis included the level of economic development, measured by GDP per capita, the share of the industrial and service sectors in employment composition, and information on labor regulations.
The results indicated that the increase in the BDAI (Business Digital Integration) maintains a significant negative relationship with rates of self-employment. This suggests that the digitalization of companies contributes to a reduction in the proportion of workers operating independently. The effect persists when considering differences in the sectoral composition of employment and the presence of labor regulations, reinforcing the idea that the adoption of digital technologies is directly associated with a transformation in the structure of work.
In contrast, when assessing the relationship between digital adoption and unemployment, no significant association was found between these variables. Even when controlling for factors such as GDP per capita, sectoral composition of employment, and labor regulations, the results indicate that business digitalization does not have a relevant impact on unemployment rates. This finding suggests that, although the adoption of digital technologies alters how workers are absorbed by the market, it occurs without substantial changes in unemployment rates. Thus, other factors may be more decisive in the variation of unemployment, highlighting the need for further investigations into the mechanisms that influence this variable.
- Structural model
The study presented a structural model to understand how the adoption of digital technologies affected the functioning of the labor market in developing countries. Data from the BDAI (Brazilian Digital Employment Agency) for the year 2016 were used to implement the model. The economy was defined in such a way that aggregate production resulted from the interaction between various types of productive activities and the participation of agents such as firms and households. This approach considered that business and household choices determined the balance between supply and demand in the labor market. The central idea was to analyze the transformations that occurred when firms introduced digital technologies and how this influenced established employment patterns.
The model considered total production as an arrangement in which formal production and production derived from self-employment were brought together by a single aggregating function of firm outputs. The structure of salaried companies was divided according to productivity and the capacity to invest in digital technology. In this sense, those that reached a high level would incorporate digital capital and specialized labor, while the others would maintain traditional methods, explaining how this differentiation shaped the internal organization and the production process.
Regarding the insertion of workers into the market, the model considers that families opted to seek formal employment in companies or to undertake self-employment, taking into account the costs and advantages of each alternative. In parallel, the search and matching processes that brought together professionals and available vacancies were incorporated, so that the encounters between supply and demand for labor were constituted through salary negotiations. This approach established how the costs of participation and market conditions influenced the setting of wages.
- Main results
The results revealed that, according to the parameters estimated in the model, the increased use of digital technologies led to a decrease in the costs of digital adoption. This, in turn, promoted a reduction in barriers to entry for new firms, affecting the market structure. It was observed that when entry costs fell, there was an expansion in the number of salaried firms.
As a consequence, this led to a considerable decrease in the rate of self-employment. The mechanisms simulated in the model indicated that the transition of workers from self-employment to formal employment intensified in scenarios with reduced entry costs. In this way, they confirmed the relevance of initial costs in explaining changes in the composition of employment.
The model also revealed that, despite notable changes in the employment structure, unemployment rates remained virtually unchanged. The authors found that the rearrangement of workers, as they migrated from self-employment to salaried employment, occurred in a way that balanced the supply and demand for labor. This stability in the unemployment rate was explained by the fact that technological modernization and the reduction of obstacles to the creation of firms led to a redistribution of workers without accentuating unemployment.
According to the authors, the mechanisms indicated that the transformation promoted by digitalization qualitatively altered the market structure without significantly impacting unemployment. Furthermore, experiments conducted with the model confirmed that the results remained even when parameters were adjusted and different scenarios were explored. The tests demonstrated the robustness of the mechanisms that led to a reduction in self-employment and an increase in the creation of salaried businesses, highlighting the importance of barriers to entry in the dynamics of the labor market. This analysis showed that, regardless of variations in imposed conditions, the effects of digital adoption were consistent with empirical data, confirming that technological transformation played a central role in reshaping employment opportunities.
- Lessons in Public Policy
In this article, the authors conducted several empirical approaches to identify how digital adoption by companies has altered labor market dynamics in developing countries. To this end, they investigated how the modernization of production processes relates to the entry costs for new firms and the transition of workers from the self-employed sector to formal employment.
The results indicated that increased use of digital technologies was associated with reduced barriers to the creation of formal businesses and a reorganization of market entry alternatives. Additionally, the evidence revealed that these changes stemmed from adjustments in the costs of technological adoption, which influenced the productive structure and employment patterns observed.
The evidence presented in this article helped identify factors related to the transformation of labor structures, providing policymakers with useful information to promote environments that favor innovation and the formalization of employment. The authors emphasized that the implementation of policies that encourage easy access to digital technology and the restructuring of hiring mechanisms has the potential to improve the supply of formal jobs. Thus, initiatives focused on digitalization have modified job opportunities and offer relevant information for the development of strategies to promote sustainable economic growth.
References
Shapiro, AF, Mandelman, FS, 2021. Digital adoption, automation, and labor markets in developing countries. Journal of Development Economics 151, 102656. https://doi.org/10.1016/j.jdeveco.2021.102656
