As a novel economic paradigm, the digital economy has become a key driver of innovation and inclusive growth worldwide, and has given rise to new forms and modes of employment. While existing literature has addressed the impact of the digital economy on employment, insufficient attention has been given to its effect on informal employment. Informal employment accounts for more than half of the total in China, which is an important aspect of high-quality employment.

Based on the micro data from the China Family Panel Studies (CFPS), this paper empirically investigates the impact of the prefecture-level digital economy on the individual choice of informal employment. The results show that the prefecture-level digital economy significantly reduces the probability of individuals engaging in informal employment. More specifically, this decline primarily occurs through two mechanisms: reducing information asymmetry and enhancing worker skills, both of which contribute to a reduced inclination toward informal employment options. Furthermore, after considering the heterogeneity within informal employment, the study finds that the digital economy notably inhibits passive informal employment and has little impact on active informal employment. Additionally, the impact of the digital economy on labor forces with different skills and genders varies. Extended analysis shows that the digital economy increases the probability of individuals moving from informal to formal employment, but it does not have a significant effect on the movement of workers from formal to informal employment.

The contributions of this paper are as follows: First, unlike previous studies at the provincial level, it constructs a digital economy development index at the prefectural level and combines it with individual micro datasets, providing a more subtle and in-depth study of the impact of the digital economy on informal employment. Second, it analyzes the mechanism from the two aspects of reducing information asymmetry and enhancing worker skills, and further examines the heterogeneity within informal employment, broadening the boundaries of existing research. Third, it identifies the formal employment transition behavior of individuals in adjacent years, and deeply examines the impact of the digital economy on individual mobility between different employment positions, capturing the dynamic changes of labor choices in the job market in the era of the digital economy.