The digital economy era is arriving at a staggering speed. According to the 2020 China Internet Development Report, the scale of China’s digital economy amounted to 35.8 trillion yuan in 2019, accounting for 36.2% of the nation’s GDP. The nominal growth rate of the digital economy almost doubled GDP growth in year-on-year terms. The digital economy’s boom is promoting profound changes to the economic development model, even to human society, putting forward new requirements for social policy.

Digital economy

What is the digital economy? Based on the widely accepted definition in the G20 Digital Economy Development and Cooperation Initiative, “the digital economy refers to a broad range of economic activities that include using digitized information and knowledge as the key factor of production, modern information networks as an important activity space, and the effective use of information and communication technology as an important driver of productivity growth and economic structural optimization.”

As an innovative economic development model following the agricultural and industrial economies, the digital economy has invited sweeping reforms to the factor of production, the productive force and productive relations.

First, data has become a key factor of production. Digitized knowledge and information, collectively dubbed as data, is inseparable from the process of digital economic development. More importantly, data and such traditional production factors as capital, labor, and land are being combined and blended constantly, bringing about multidimensional and systemic changes to production factors.

This means the ability to collect, process, hold, and use data resources will become the source of enterprises’ competitive edge and have a great bearing on laborers’ employment, incomes, and social stratification.

Moreover, digital technologies have significantly emancipated productive forces. The rapid iteration of technologies like mobile communication, the internet, artificial intelligence, and big data, as well as the two-wheel advancement of digital industrialization and industrial digitalization, have further unleashed productive forces. Not only have vigorous industrial clusters for global information communication been created, but through the integrated transformation of traditional industries, managerial and operational efficiency has been enhanced comprehensively to boost economic growth.

At the same time, thriving platform enterprises, which are bolstered by digital technologies, indicate that the evolution of productive forces in the digital economy era is driving major changes to production relations. Among the world’s top 10 enterprises by market value in 2019, seven were platform companies. This highlights the quick rise of such enterprises in the digital economy.

Between platform enterprises and users, a factual longitudinal relationship has been shaped, resulting in a dual management model characterized by platform management and government regulation. The unique role of platform enterprises not only demands more from the government in terms of economic regulation, but has also generated big impacts on the development of social policy.

In summary, as a new economic development model, the digital economy is triggering systemic, holistic changes to human society. Meanwhile it has shaken the foundation of the economic society on which traditional social policy is built, posing a series of challenges to social policy.

Requirements for social policy

The digital economy is reshaping the state fiscal extractive capacity which supports social policies. Current taxation and the tax collection and management system are incompatible with the digital economy.

Tax revenues are the foundation for the survival of modern states and essential to operating social policies. The present tax system is suited to the industrial economy. In the industrial society, the national economy’s structure and organizational model is relatively stable, and modern states have gradually established complete statistical and administrative systems for the national economy.

On this basis, clear statistics and accounting of key factors like the number of economic entities and taxpayers within a country and smaller regions, as well as employment groups that are duty bound to join social insurance programs, will realize accurate verification, effective tax collection, and management of general taxes and related expenses for social insurance.

The digital economy has brought new problems to the tax system. Based on data, it has broken the spatial limitations of economic activities, making the cross-regional flow of production factors more convenient. Transnational enterprises can decentralize and aggregate the value chain more easily to minimize taxes in global profit distribution and transfer, thus challenging the traditional territorial tax collection and management system.

In the meantime, trading activities in the digital economy are highly virtual. On ubiquitous network platforms, commodity and service trade can be carried out without close human-to-human contact, which unfortunately makes tax collection and management more difficult.

Furthermore, the multitude of producers and consumers on internet platforms, the blurring of the line between the two, and the emergence of the sharing economy have added difficulties to determine taxation subjects and the tax base. The impact of the digital economy on the state’s tax extraction capacity has severely weakened the existing economic foundation for redistribution-featured social policies.

Also the digital economy is redefining the premise of social policies. The current social policy system fits the industrial economy, preconditioned by industrial workers’ standardized careers and stable employment relations, as a result of industrialized production models for coping with risks of aging, unemployment, and diseases. New employment characteristics in the digital economy are destabilizing employment relations, as new factors and distribution features arise in risks associated with employment, undermining the two pillars of employment policy and the social insurance system.

In the digital economy, technical unemployment risks resulting from AI-related technological updates are increasing. Despite disputes over the impact of digital technologies like AI on total employment, the basic consensus is that the digital economy has set higher bars for laborers’ knowledge and skills. Low-skilled and procedural jobs are being, and will continue to be, replaced by AI-related technologies substantially. This multiplies risks for unemployment in technical fields. With the acceleration of knowledge updates, technical unemployment risks will remain, and are likely to mount.

In addition, new employment relations have affected the sustainability of the social insurance system. The digital economy has spawned new professions like online ride-hailing drivers, live-streamers, and couriers, transforming the employment model from the stable “employer-employee” model into a flexible “platform-individual” model. This change has tested current labor laws, labor contract laws, and social insurance systems.

Take social insurance as an example. Most workers in flexible employment forms opt for a low contribution base when participating in social insurance, and the overall payment rate is lower than in an employer-employee co-payment model. However, the two payment models share the same basic pension expenses in the future.

Other calculations reveal that workers in flexible employment forms, who can choose whether or not they want to be insured, spend significantly more in medical care than regular employees who are compelled to join social insurance programs. In other words, groups of flexible employees can alternatively decide to participate in social insurance, which affects the original compulsory and obligatory nature of social insurance.

Additionally, in the platform-individual model, practitioners like couriers are exposed to high vocational risks. Compared with the traditional “employer-employee” model, their employment relations with platform enterprises are looser, so many challenges loom in attributing responsibility for work-related injury insurance payments and collecting evidence for work-related injuries.

Such new changes have fundamentally threatened the social insurance model based on stable employment relations and supported by the industrial economy’s employer-employee co-payment model.

Latent risks of uneven income distribution in the digital economy have also presented challenges to the social policy practice model. The current model is based on redistribution tools, such as social policies and social relief, and targets social risks and the first income distribution gap from the earlier digital economy era. The present digital economy demonstrates new features of uneven income distribution, putting the social policy practice model under great pressure.

The difference in innovation, information acquisition, and utilization abilities will further influence laborers’ incomes. On the one hand, the role of innovation in the digital economy will be stronger, so innovative high-end talent will receive better pay. On the other hand, ordinary laborers face a new situation, in which pervasive technical unemployment risks will restrict their incomes and jeopardize stability, while new gaps will appear due to different information-related abilities and the digital divide.

Increasing risks in the labor market and new gaps both hint at possible impacts of the digital economy on income equilibrium. This requires social policies with fairness and justice as core values, as the economic foundation and presumptions of the current social policy system have been undermined by the digital economy. The tension between rising functional demands and weakening abilities will notably intensify the practical influence of social policies in the digital economy.

Facing the above challenges, social policymakers should further expand channels for pooling policy resources, reconstruct policy design in regard to social insurance, and continuously strengthen laborers’ sustainable employment abilities in the face of accelerated knowledge updates and challenges of technological substitution by AI.

In a broader vision, it is essential to reexamine the industrial economy’s social policy, alongside the changing relationship between economic policies and social policies, and reflect on ways to rebuild a social policy system which is compatible with the digital economy. This is the mission and responsibility of social policy researchers in the age of the digital economy.

Xu Xiaoxin is an associate professor from the School of Social Development and Public Policy at Beijing Normal University.