How Pandemic Accelerated Digital Transformation in Advanced Economies

IMF Blog, March 21, 2023

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Digital technologies shielded labor and productivity from the pandemic and accelerated adoption in lagging countries, but digitalization gaps persist.
The analysis focuses on digitalization measured by the share of workers using a computer connected to the internet and documents implications for productivity and labor markets.

Pre-pandemic variation:
- Sweden: more than four-fifths of workers had computers with internet access in 2019.
- Greece: less than two-fifths of workers had computers with internet access in 2019.
Pandemic-era changes:
- Greek share surged almost 8 percentage points, to 45 percent.
- Across advanced economies, digitalization increased by an average of 6 percentage points.
Sector and firm-size patterns:
- Digitalization has historically been lower in contact-intensive sectors.
- Small businesses tend to lag larger counterparts; small firms enjoyed the biggest gains during the pandemic.
- Example cross-sector gap: Greek restaurants and hotels trail Sweden’s by 38 percentage points.
- Sectors that are least digitalized invested more in digitalization during the pandemic.

Measures used:
- Labor productivity: output per hours worked.
- Total factor productivity: output relative to total inputs used in production.
Protective effects during the pandemic:
- High levels of digitalization helped shield productivity and employment from the shock.
- The most digitalized industries experienced significantly smaller losses in labor productivity and hours worked than less digitalized sectors.
- At the depths of the pandemic in 2020, higher digitalization in a sector reduced labor productivity losses by a sizable 20 percent when comparing the 75th and 25th percentiles of digitalization.
- Counterfactual impact: 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.
Emerging firm-level divergence:
- Evidence for larger firms shows a growing total factor productivity differential between high- and low-digitalized firms as the crisis drew to a close.
Uncertainty:
- It is too soon to assess longer-term effects, but digitalization clearly helped boost productivity, protect employment, and mitigate disruptions during the pandemic.

Concerns and observed dynamics:
- Initial policy concern: greater digitalization could widen job market inequality by increasing demand for higher-skilled workers and displacing low- and medium-skilled workers.
- Observation: digital occupations were more shielded from layoffs than non-digital ones during the crisis, but there is little evidence so far of a structural shift in the composition of labor demand toward digital occupations.
- Vacancies data (from a September working paper) showed a strong increase in the demand for less-skilled workers as the economy started to recover.
Working-from-home (WfH) revolution:
- Prior to the crisis, only 5 percent of workers typically worked from home in Europe.
- By 2021 that had topped 16 percent.
- Countries with more common WfH saw larger increases in labor force participation, suggesting WfH may attract more workers:
- Netherlands: over 20 percent of workers usually work from home; participation has already surpassed pre-crisis levels.
- Italy: less than 10 percent of workers work from home; participation remains below pre-pandemic trends.
- Welfare and environmental effects:
- WfH can generate significant welfare gains by reducing commutes and increasing time management flexibility.
- WfH can boost attachment to the labor market and the labor supply, while supporting the environment by reducing commuting.

Policymakers should seize the moment to continue closing digitalization gaps and ensure gains are broadly shared.
Recommended actions include:
- Promoting policies that maintain healthy competition in digital markets.
- Adapting labor laws and regulations to facilitate remote work.
Objective:
- Build a more resilient and adaptable economy better prepared to navigate future crises.

Source: How Pandemic Accelerated Digital Transformation in Advanced Economies (IMF blog, March 21, 2023).