How does broadband internet affect firm-level labor misallocation: The role of information frictions

• Published in: China economic review 2023-12, Vol.82, p.102067, Article 102067
• Main Authors: Yu, Li, Ma, Tiemeng, Wu, Sirong, Lyu, Zhuoyang
• Format: Article
• Language: English
• Subjects: Broadband internet; Information frictions; Information sharing; Misallocation
• ISSN: 1043-951X; 1873-7781
• DOI: 10.1016/j.chieco.2023.102067

This study examines an understudied channel through which information and communication technology (ICT) affects labor markets: specifically, its role in enhancing labor allocation efficiency by mitigating information frictions. To investigate this causal relationship, we take advantage of the natural experiment created by the arrival of broadband internet in China in 2000. We employ a difference-in-differences (DiD) estimation strategy, supplemented by instrumental variables (IV) derived from the average incidence rates of lightning and a theoretically optimal backbone network construction plan. Our results show that the arrival of broadband internet markedly alleviates information frictions in labor markets, leading to a significant reduction in firm-level labor misallocation. The effects arising from the decline in information frictions ease the labor shortage problem faced by firms and are more significant in areas with more developed information-sharing networks. Lastly, we estimate the lower bound of the effect of changes in misallocation on treated cities' aggregate productivity, which is 6.3%. •This paper uncovers a novel mechanism through which ICT matters for labor allocation: the emergence of information and the sharing of information.•We exploit the exogenous variation provided by the arrival of broadband internet in China in 2000.•We find that a 10% increase in the level of Internet diffusion leads to a 2.1 percentage point decrease in firm-level labor misallocation.•We use the average incidence rate of lightning and a hypothetical optimal construction plan for the backbone network to address potential endogeneity problems.•The main mechanism in this paper is that falling information friction drives the labor supply curve faced by firms to the right, easing their labor shortages.•We provide the lower bound of the efect of changes in misallocation on treated cities' aggregate productivity, which is 6.3%.