How pandemic accelerated digital transformation in advanced economies

By Florence JaumotteMyrto OikonomouCarlo Pizzinelli, and Marina M. Tavares

As the world does its best to move on from the pandemic, one of the lasting legacies for many advanced economies has been greater adoption of digital technologies. Working from home is now common, and many companies have expanded online operations.

And as the crisis recedes, we can now see that digitalization, as measured by the share of workers using a computer connected to the internet, has proved to be a silver lining across many economies. This has far-reaching and long-lasting implications for productivity and labor markets, as we detail in a new staff discussion note focusing on advanced economies.

Before the pandemic, digitalization varied widely by country, industry, and company. For example, more than four-fifths of workers in Sweden had computers with internet access in 2019, the most in our study, while Greece had the lowest share, with less than two-fifths. Two years later, the Greek share had surged almost 8 percentage points, to 45 percent, narrowing the gap with Sweden with one of the most significant gains shown in our study.

Across advanced economies, digitalization increased by an average of 6 percentage points, our research shows. The results underscore how the pandemic accelerated digitalization, especially in economies or industries that had been lagging.

Digitalization has historically been lower in contact-intensive sectors, while small businesses tend to lag larger counterparts, a trend observed across many countries. Notably, however, these disparities were not solely driven by differences by industry. Greek restaurants and hotels, for example, trail Sweden’s by 38 percentage points.

Small firms, which have historically been less digitalized, enjoyed the biggest gains. Similarly, sectors that are least digitalized invested more in digitalization.

digitalizatoin

The surge in digitalization saved many firms during the pandemic, helping them adapt to lockdowns through remote work and online operations. Our research measures possible gains of digitalization using two different productivity gauges: labor productivity, which measures output per hours worked, and total factor productivity, which tracks output relative to the total inputs used in its production. Our findings confirm that high levels of digitalization helped shield productivity and employment from the shock, with the most digitalized industries experiencing significantly smaller losses in labor productivity and hours worked than less digitalized sectors.

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At the depths of the pandemic in 2020, our research shows, higher digitalization in a sector reduced labor productivity losses by a sizable 20 percent when comparing the 75th and 25th percentiles of digitalization. Moreover, had less-digitalized economies matched the 75th percentile in the sample for each sector, aggregate labor productivity growth during the pandemic would have been a quarter higher.

While some changes brought about by the pandemic may not endure, evidence for larger firms shows a growing total factor productivity differential between high- and low-digitalized firms as the crisis drew to a close.

It’s too soon to assess the longer-term effects of digitalization, but we can see that it helped boost productivity, protect employment, and mitigate economic disruptions during the pandemic.

Labor markets and remote work

At the onset of the pandemic, policymakers feared greater digitalization could widen job market inequality by increasing demand for higher-skilled workers and displacing low- and medium-skilled workers.

While digital occupations were more shielded from layoffs than non-digital ones during the crisis, there is little evidence so far of a structural shift in the composition of labor demand toward digital occupations. Indeed, as we showed in a September working paper, vacancies data showed a strong increase in the demand for less-skilled workers as the economy started to recover.

A change that is more persistent and could have long-term implications in the labor market is the working-from-home revolution. Prior to the crisis, only 5 percent of workers typically worked from home in Europe, but by 2021 that had topped 16 percent.

Countries where working from home is more common saw larger increases in labor force participation, indicating that this arrangement may attract more workers to the labor market. For example, participation has already surpassed pre-crisis levels in the Netherlands, where over 20 percent of workers usually work from home, while in Italy, where less than 10 percent of workers work from home, participation remains below pre-pandemic trends.

Working from home can generate significant welfare gains by reducing commutes and increasing time management flexibility. Working from home can boost attachment to the labor market and the labor supply, while supporting the environment by reducing commuting.

The pandemic accelerated adoption of digital technologies and shielded productivity. However, with persistent gaps across countries and sectors, policymakers must seize the moment and take steps to continue closing the digitalization gap and ensure that the gains from digitalization are broadly shared.

This includes promoting policies that maintain healthy competition in digital markets and adapting labor laws and regulations to facilitate remote work. Doing so can build a more resilient and adaptable economy better prepared to navigate future crises.