Firms’ digital innovation in the pandemic: how have workers been affected?

Covid-19 has accelerated digitisation in businesses and changes in working practices. Effective training and skills policies will be needed to support continued innovation in firms, while also building workers’ resilience in times of economic transition.

The pandemic has had a major impact on businesses and their employees. Social distancing requirements, shifting patterns of demand and continued uncertainty have brought changes in working practices and the introduction of new processes, products and services, many of which are likely to stick. Key examples include increased working from home and online sales. The adoption of new digital technologies has been central to these changes.

In the context of the broader debate about the effects of technological change on employment and jobs (see, for example, Acemoglu and Restrepo, 2019) a key question relates to how Covid-19-induced technology adoption has and will affect workers.

Within firms, the introduction of new digital technologies or automated processes might have labour-saving effects – meaning that fewer workers are needed – where some routine tasks can be performed more efficiently by new technologies. The risks of ‘forced automation’ on low-wage workers were highlighted early on in the pandemic (Autor and Reynolds, 2020) and have been studied empirically in the context of the United States (Ding and Molina, 2020).

But at the same time, new technologies alter the nature of work, create new tasks and change the demand for skills, and can complement (certain types of) labour. For instance, the adoption of marketing automation technologies powered by artificial intelligence (AI) makes it possible for businesses to leverage data at scale and raises the demand for skills associated with data analytics.

A survey of recent studies on the effects of automation on labour demand finds more empirical support for a positive impact on employment overall at the firm level (Aghion et al, 2022). Automating firms can become more productive and grow, generating new jobs (potentially at the expense of their competitors, though relationships at the industry level are also positive).

The Centre for Economic Performance (CEP) and the Confederation of British Industry (CBI) have conducted two bespoke business surveys, the first in July 2020 and the second a year later, to generate timely data on the extent, nature and effects of technology adoption in response to the crisis.

The second survey included a series of questions that sought to shed light on how technology adoption since the onset of the pandemic has affected the workforce. The rise of working from home and the associated increased flexibility have clearly been enabled by the widespread adoption of remote working technologies such as Zoom or Microsoft Teams. But this work set out to explore how effects on workers vary according to the types of technology introduced, or the characteristics of firms doing the adopting.

How has Covid-19 affected technology adoption in businesses?

As set out in a previous Economics Observatory article, the effects of a crisis on technology adoption are theoretically ambiguous (Valero and Van Reenen, 2021). But the evidence to date suggests that the pandemic has accelerated technology adoption in firms, in part due to the nature of the crisis (requirements for social distancing) and the readiness of digital technologies that allowed firms and workers to adapt quickly in sectors where this is feasible.

Three months into the crisis, the first CEP-CBI survey found that over 60% of businesses had adopted new digital technologies (Riom and Valero, 2020). This compared with 13% engaging in ‘process innovation’ – defined as making ‘significant changes in the way that goods or services are produced or provided’ – over the three years to December 2018 (UK Innovation Survey). Other studies at that time also pointed to increased digitisation (Be the Business, 2020; ERC, 2020; CBI, 2020).

The second CEP-CBI survey, covering an additional 12 months, reaffirmed the strong innovation response among UK businesses. Three-quarters of firms adopted digital technologies over this timeframe (see Figure 1). Over half (55%) had adopted new digital capabilities and nearly 70% had adopted new management practices. In addition, over 60% of firms had introduced new products and services.

Figure 1: Overall innovation response to Covid-19 (March 2020-July 2021)

Source: CEP-CBI survey, 2021. Notes: N=425, N=393, N=388, N=376 responded to each question, respectively

In terms of timing, while the adoption of digital technologies and management practices occurred early on (March-June 2020) at many firms, a large share of firms continued to innovate beyond the initial lockdowns. In contrast, the share of firms adopting new digital capabilities was constant, while product innovation increased over time.

But were these activities induced by the pandemic? And are new processes and products here to stay beyond it?

Most firms considered that the pandemic had accelerated their innovation plans, and between 11% and 34% of firms (across innovation types) reported that the pandemic actually prompted them to innovate. Having made these changes, most firms expected them to outlast the pandemic. Further, the reported effects on business performance are broadly positive, in particular with respect to resilience.

These findings suggest that Covid-19 is building the innovative capacity of businesses, which is a cause for optimism with regards to the UK’s productivity puzzle. It is worth noting that the respondents in the CEP-CBI survey were larger than the typical UK firm. Indeed, technology adoption was more likely in larger, more digitally advanced firms. These firms were also more likely to report increased business resilience as a result of adoption – evidence that could point to a widening digital divide in the future.

This type of uneven technology response has been found in other surveys, including those focused on remote working in OECD countries, and digital technologies internationally. In the UK, the Office for National Statistics Business Impact of Covid-19 survey (ONS BICS) conducted in August 2021 (wave 38) included similar questions on technology adoption and found that on a larger and more representative sample, 28% of businesses had adopted new technologies (the share is higher among businesses with ten or more employees).

While this is substantially smaller than the 75% in Figure 1, it still represents a rise compared with pre-pandemic ‘process innovators’ discussed above. In addition, 46% of the BICS sample answered that they were ‘not sure’ when asked about technology adoption – versus a negligible share in the CEP-CBI survey where the respondents were perhaps more used to being asked detailed questions on technology-related issues.

What technologies have businesses been adopting?

While remote working technologies are perhaps the most commonly discussed among adopters in the CEP-CBI survey, new technologies also related to a range of business functions, from logistics to security. The most cited were sales and marketing, followed by people management and remote working, with around 70% and 65% of adopters, respectively, selecting these (see Figure 2).

Figure 2: Business functions that newly adopted digital technologies relate to

Source: CEP-CBI survey, 2021. Notes: N=307 (Adopters that answered this question)

Technologies for remote working – such as video conferencing or collaboration technologies – were the most adopted specific technology types, either alone or in ‘bundles’ with other technologies including online marketing tools (for example, a new website or social media platforms/e-commerce), cloud, data analytics and cybersecurity.

How have newly adopted digital technologies affected work?

In terms of overall impact on the size of the workforce, most firms (63%) reported that newly adopted digital technologies had no impact (see Figure 3). The share saying that they had reduced the need for workers (16%) was similar to the share reporting an increased need (13%). Given that the furlough scheme was in operation during this period – and a high share of survey respondents, over 70%, had accessed it – it was potentially too early to detect changes with respect to employment resulting from new digital processes.

There was more evidence of changes in working practices. An increase in flexible working stands out, with 75% reporting an increase. But training, productivity and worker satisfaction were also reported to have risen in over 40% of firms that adopted new technologies.

Almost half (45%) stated that they had reorganised staff or reallocated employees to new tasks as a result of new technology adoption. And while most firms reported no change to working hours, 18% reported a rise due to the implementation of new technologies.

Figure 3: Effects of technology adoption on workforce

Source: CEP-CBI survey, 2021. Notes: N=319 (adopters that answered this question)

There were also associated changes in hiring activity. Over a quarter reported an increase in hiring in specialist skills, and a similar share stated that they were hiring from a broader geography than before the pandemic (see Figure 4). This is a phenomenon enabled by increased remote working and brings implications for the future shape of cities(Nathan, 2021).

Remote working was still prevalent in July 2021, and at that point – before Omicron emerged and guidance changed – expectations for working patterns for January 2022 looked very different to pre-pandemic, with one to two days at home being the most popular option among firms.

Figure 4: Effects on skill needs and hiring

Source: CEP-CBI survey. Notes: N=319 (Adopters that answered this question)

How have effects varied by firm and technology type?

Firms that had adopted new digital technologies prior to the pandemic were more likely to report improved worker productivity because of new technology adoption, controlling for other key business characteristics, such as firm size, age, sector, human capital and location. But they were less likely to report an increase in flexible working. Perhaps such firms, being more technologically advanced, had fewer ‘teething’ problems with new technologies and already had flexible working practices in place.

Importantly, firms with a higher degree share among employees were more likely to report an increase in overall workforce size as a result of technology adoption, consistent with new digital technologies and skills being complementary.

There were also different effects according to the type of technology being adopted. Where firms adopted technologies relevant for people management, remote work or other ‘business-as-usual’ tasks, they were more likely to report increased flexible working.

Firms that adopted remote working technologies also saw a rise in average working hours. This is consistent with other studies that have shown that home workers have put in more hours since Covid-19 (see, for example, Barrero et al, 2021). Firms that adopted new technologies relevant for research and development (R&D) functions were more likely to report an increase in workforce size.

What are the implications for skills policies?

Covid-19 has increased technology adoption and other types of innovation in businesses, and these activities are affecting the workforce. Firms considered that skills constraints were the biggest barrier to technology adoption in the second CEP-CBI survey, perhaps reflecting more widespread shortages at that time.

This highlights the importance of skills and training policies for innovation in businesses, as well as building workers’ resilience to changes induced by Covid-19 and broader transitions during this coming decade, including the move towards net zero and changes due to Brexit. This is particularly relevant against a background of skills gaps and declining on-the-job training in firms (Li et al, 2020).

Continued digitisation in businesses will occur at the same time that the move towards net-zero emissions brings changes to strategies, operations and jobs. Indeed, environmental considerations are being taken into account to either a great or some extent by around two-thirds of firms in the CEP-CBI survey.

This is happening across a number of areas, including decisions on technology adoption, working practices and office design or location. It presents an opportunity for a joined-up approach to business support and skills policies to boost productivity growth in an inclusive and sustainable way.

What else do we need to know?

The new CEP-CBI survey data provide a first look at the potential effects of pandemic-induced technology adoption on the workforce. There are well-known caveats in the analysis of self-reported performance measures. In particular, we might expect biases that result in firms over-reporting socially desirable behaviours (such as positive effects of adoption on company or worker performance) and under-reporting socially undesirable behaviours (such as a reduction in headcount). But knowing the responses were anonymous should mitigate these effects. Merging business surveys with administrative data will allow researchers to track the actual performance of firms, and trace the effects of technology adoption on employment and other worker outcomes over time.