Can digital transformation reduce within-firm pay inequality? Evidence from China

Digital transformation has been extensively discussed in recent years, however, its impact on the pay disparity within a firm remains unclear. Using data of listed companies in China over the time period from 2007 to 2020 and employing a textual analysis approach to measure digital transformation, this paper investigates whether and how digital transformation affects within-firm pay inequality. It is found that corporate digital transformation effectively reduces the pay inequality between executives and ordinary employees. The channel tests indicate that digital transformation raises the average pay of ordinary employees instead of executives by improving firm efficiency and optimizing human resource structure, thus leading to the reduction of pay inequality. Further investigation shows that digital transformation has greater effects on pay inequality in nonstate-owned-enterprises (non-SOEs), labor-intensive companies and companies where employees have stronger bargaining power. In addition, the impact of digital transformation on reducing pay inequality can persist for at least three years.