The direction of digital transformation: labor-saving versus time-saving trajectories in industrial dynamics

Abstract The paper develops a theoretical framework with some skill heterogeneity to investigate the way the direction of process innovation, labor-saving versus time-saving, shapes the evolution of the industrial structure, firm dynamics, and macroeconomic performance in a digitally transforming economy. We find that labor-saving innovations deliver higher capital deepening but engender structural fragility. Conversely, when firms focus on time-saving innovations, the economy grows more slowly but exhibits greater resilience: lower downtime supports higher firm survival, reduces volatility, and sustains a more competitive and inclusive market structure. These dynamics are emphasized when labor shortage constrains production capacity. We also discuss the design of more targeted and effective innovation policies, capable of steering digital transformation in directions that are economically robust and socially inclusive.