At the onset of the COVID-19 pandemic, policymakers and academics alike expected that the pandemic and  subsequent containment policies would accelerate digitalization, speeding up structural change toward a more  digital economy. This acceleration in digitalization was seen as a potential silver lining to the pandemic,  equipping businesses with digital technologies that could increase productivity and growth over the long term. 

At the same time, there were concerns that digitalization could displace medium- and low-skilled workers,  driving greater inequality in the labor market. Two years after the onset of the pandemic, productivity in many  sectors remains below its precrisis trend, and labor markets are characterized by shortages of low-skilled rather  than high-skilled workers. How much digitalization did actually take place? How did it affect productivity and  labor markets during the pandemic? And what longer-term effects can be expected? This Staff Discussion Note  sheds light on these questions for a selected group of advanced economies. With only two years of data  available, proper caution should however be applied in interpreting the permanence of the results. 

The COVID-19 pandemic did accelerate digitalization, measured as the share of workers using a computer with  access to the internet in advanced economies, and while the increase was broad-based, the largest progress  was observed in countries, sectors, and firms that started with low digitalization levels, including southern and  eastern European countries, the food and accommodation sector, and smaller firms. 

Digitalization helped substantially shield productivity and employment from the pandemic shock. At the height  of the pandemic, controlling for the characteristics of the sector, labor productivity and hours’ losses in highly  digitalized sectors were significantly smaller relative to the same less digitalized sectors in other countries. 

Higher digitalization mitigated the economic disruptions from the pandemic, increasing aggregate productivity  growth by a quarter and reducing the loss in hours worked by a third. In 2021, however, productivity and hours  rebounded more strongly in less digitalized sectors that had experienced larger losses in 2020. While it is still  early to appraise the longer-term effects of the recent digitalization induced by COVID-19, evidence for larger  (publicly listed) firms shows a growing total factor productivity (TFP) differential between high- and lowdigitalized firms at the exit of the crisis. Whether smaller firms will be able to reap the benefits from their  investments in digitalization may depend on policies in place to ensure healthy competition in digital markets. 

In labor markets, while workers in digital occupations were more shielded from layoffs than those in non-digital  occupations during the crisis, there is little evidence so far of a structural shift in the composition of labor  demand toward digital occupations. Vacancies data show that the initial increase in the share of digital  occupations subsequently reversed, consistent with the high labor market tightness observed for lower-skilled  workers. This suggests that the increase in digitalization was concentrated in primary digitalization forms that  allowed businesses to perform activities without in-person interactions rather than fundamentally overhaul  production. A more persistent change is the switch to work from home, which increases workers’ welfare by  reducing commuting time and improving time management flexibility, and could boost labor supply.