Will Digital Technology Absorption Reduce Service Employment? Based on the Labor Division Theory of Neoclassical Economics and Spatial Spillover Effect

ABSTRACT Digital technology has an important contribution to enhancing service industry, but in the existing literature, there is no consensus on the impact of digital technology on service employment. We construct a micro‐mechanical model grounded in labor division theory of Neoclassical economics to elucidate the intrinsic mechanism of digital technology affecting service employment, measure and evaluate the digital technology development level and transaction efficiency indicators in 285 prefecture‐level cities of China from 2011 to 2019. The results, based on various econometric methods, show that digital technology expands service employment mainly by improving transaction efficiency and enhancing industry division of labor. We find the evidence that digital technology does not reduce service employment in terms of overall scale and there is significant industry and regional heterogeneity. Further, it is found that the effect of digital technology on service employment has spatial spillover that has important implications for narrowing regional economic gap.