The rapid development of the digital economy has become a new path to promote market-oriented allocation reform of factors of production. Reducing the distortion of labor prices, and accelerating the transition to a quality-based “demographic dividend” by improving the efficiency of labor allocation are crucial to the high-quality development of China’s economy. From the perspective of market segmentation and labor bargaining power, this paper constructs the mechanism of digital economy development affecting labor price distortion; Meanwhile, the impact of digital economy development on labor price distortion is discussed based on Chinese city-level data. Empirical analysis finds that promoting the development of the digital economy can help reduce labor price distortions. From the regional perspective, the inland region has a larger impact than coastal region. From the city scale perspective, the development of digital economy significantly reduces the distortion of labor price in cities with population size less than or equal to 5 million. From the time perspective, the reduction effect is significant after 2012. Mechanism analysis shows that the development of digital economy will reduce labor price distortions by reducing market segmentation and enhancing labor bargaining power. The panel quantile model analysis finds that the higher the degree of labor price distortion is, the better the reduction effect of digital economy development on labor price distortion is.
