COVID-19 acceleration in digitalisation, aggregate productivity growth and the functional income distribution

Abstract

This paper characterises the conventional and the digital sector of the EU economy since the late 90s and introduces a two sector growth model which highlights structural differences between the two sectors. In contrast to conventional goods and services, digital goods and services are more easily scalable but require more upfront intangible investment. These features require consideration of fixed costs and a departure from perfect competition and raise issues about market entry. Another important dimension is the skill demand of both sectors, with the latter requiring a larger share of workers with digital skills. Since COVID-19 is expected to induce a persistent increase of demand for digital services, we use this model to estimate the likely economic impacts. We are in particular interested how the digital transition is affecting the labour market and the functional distribution of income. The paper shows how the distribution of economic rents between workers with digital skills and platforms is determined by labour supply conditions and entry barriers. This suggests that there is a role for competition policy and labour market policies to support the digital transition.