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

The paper develops a theoretical framework withsome 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 mar- ket structure. These dynamics are emphasized when labor shortage constrains production capacity. We also discuss the design of more targeted and effective innovation policies, capa- ble of steering digital transformation in directions that are economically robust and socially inclusive.