Local Labour Market Resilience: The Role of Digitalisation and Working From Home

ABSTRACT This article shows that digital capital and working from home were essential for the resilience of local labour markets in the context of the COVID‐19 crisis in Germany. Employment responses differed widely across local labour markets, with differences in short‐time work rates of up to 30 percentage points at the beginning of the pandemic. Using recent advancements in the difference‐in‐differences approach with a continuous treatment, we find that digital capital potential higher by one standard deviation led to a short‐time work rate that was lower by 1.5 percentage points on average at the onset of the shock. The effect was nonlinear, disproportionately disadvantaging regions at the lower end of the digital capital distribution. We also find that working from home potential led to lower short‐time work, especially during the first lockdown period. However, digital capital smoothed the employment shock beyond the effect of remote work, extending into 2021. Moreover, local digital capital potential increased the adoption of remote work after the shock.