Abstract

In recent years, the question of whether digital transformation can reduce the intra-firm pay gap has sparked considerable debate. However, little attention has been given to the feedback effect that a narrower pay gap may have—an issue central to corporate sustainability. This paper examines the relationship between digital transformation and the intra-firm pay gap based on data from Chinese-listed companies from 2012 to 2023. It is found that digital transformation significantly promotes the narrowing of the intra-firm pay gap. In turn, a narrower pay gap has a nonlinear, inverted U-shaped effect on digital transformation. This suggests there is an optimal balance where both factors support corporate sustainability. Further analysis shows that this interaction is mainly achieved through human capital structure and employee effort, especially in large enterprises, non-labor-intensive industries and regions with developed digital infrastructure.