Digital Transformation and Skill Shortages: Why Technology Grows Sales but Demands More Skills?

What is it about?

Severe skill shortages are forcing many companies to rethink how they operate. This study examines when and why small and medium-sized enterprises (SMEs) adopt digital technologies specifically to replace missing human workers. Analyzing survey microdata from over 14,000 firms across 35 European and non-European countries (Flash Eurobarometer 537) through a combination of logistic regression and machine learning (Random Forests), the paper identifies which firm characteristics and public support tools actually drive labor-substituting digitalization. Surprisingly, company size does not determine whether a firm replaces missing staff with technology; instead, older firms, members of industry clusters, and companies receiving public consulting, employee training, or direct grants are significantly more likely to automate tasks in response to labor deficits.

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Photo by Vitaly Gariev on Unsplash

Photo by Vitaly Gariev on Unsplash

Why is it important?

As demographic shifts and technological transformation intensify labor shortages, policymakers are pouring billions into SME digitalization—often without knowing which instruments actually help firms overcome staffing bottlenecks. This study provides novel empirical evidence that non-financial public support (such as staff training, mentoring, and advisory services) and direct subsidies are far more effective at helping SMEs substitute missing labor with digital tools than indirect fiscal measures like tax incentives or credit lines. Furthermore, by highlighting the power of industry clusters and pinpointing lagging sectors like construction, the findings offer policymakers a concrete blueprint: shift away from blanket tax relief and instead fund targeted training programs, collaborative networks, and direct support for younger SMEs.