Factors influencing the decision to hire contract labour by Indian manufacturing firms

ABSTRACT

Over a third of workers employed in the Indian formal manufacturing sector are ‘contract’ workers – hired through the services of labour contractors, facing lower wages and no job security in relation to regular workers. We investigate the role of a variety of factors that influence the decision of employers to hire in contract workers, using information from a specially commissioned survey of manufacturing firms. While there are immediate cost advantages that tilt firms towards hiring in contract labour, a counterforce has employers favouring regular workers in firms that have a large proportion of their workforce concentrating on production activity – probably instances where long-term human capital investment by regular workers is important for the firm.

Abbreviation: CLA: Contract Labour (Regulation and Abolition) Act, 1970 ASI: Annual Survey of Industries NIC: National Industrial Classification MSME: Micro, Small and Medium Enterprises SEZ: Special Economic Zone ICRIER: Indian Council for Research on International Economic Relations

KEYWORDS:

• Employment
• contract worker
• manufacturing
• labour laws
• survey
• probit

Acknowledgments

An earlier version of the paper was published as ICRIER Working Paper No. 341. The authors would like to thank ICRIER for allowing us to incorporate some material from the working paper. We thank K L Krishna, B N Goldar and Kunal Sen for their suggestions and comments and Pankaj Vashisht for his help with the sampling frame of ASI. The authors also thank the round table participants on Labor Reforms and Manufacturing in India held at ICRIER for their valuable comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. This term refers to economic activity that is captured by Indian government records.

2. For a more complete description see Das et al. (2018) and Singh et al. (2018).

3. As per Section 10 (2) (b) of the Contract Labour Act the term perennial is explained in the following manner ‘whether it is of perennial nature, that is to say, it is of sufficient duration having regard to the nature of industry, trade, business, manufacture or occupation carried on in that establishment’.

4. It may be noted that we assume cost to be static in this model because our data from the primary survey is a cross-section and therefore it is not possible for us to account for inter-temporal changes. However, in reality, the adjustment costs involved in hiring and firing of regular workers will be dynamic in nature. Nevertheless, we assume that our specification provides a broad insight into how cost differential (whether static or dynamic) affects a firm’s decision to hire contract workers.

5. This encouraged us to use the same data set to explore the interesting relationship between the establishment of trade unions and the characteristics of manufacturing firms (see Singh, Das, Abhishek, & Kukreja, 2019).

6. For an early exposition on this line of thinking see Klein, Crawford, and Alchian (1978), for a survey Malcomson (1997) and for a recent work Bentley and Nakavachara (2007), the latter one among a large literature.

Additional information

Funding

The paper is a part of the ‘Jobs and Development’ research project at ICRIER supported by the World Bank (Grant No.: 502915-01). Financial support from World Bank is gratefully acknowledged;World Bank Group [502915-01].

Notes on contributors

Jaivir Singh

Jaivir Singhis currently Professor at the Centre for the Studyof Law and Governance, Jawaharlal Nehru University, havingpreviously taught at the University of Delhi. Trained as aneconomist at the Delhi School of Economics, University of Delhi,his research work aims at an interdisciplinary exploration of lawand the economy. He has published on diverse topics that includethe Indian Constitution, Regulation, Labour Law, CompetitionLaw, Corporate Law and International Investment Treaties.

Deb Kusum Das

Deb Kusum Dasis an Associate Professor with Department ofEconomics, Ramjas College, University of Delhi and an externalconsultant with Indian Council for Research on InternationalEconomic Relations (ICRIER), New Delhi. He holds a Ph.D fromDelhi School of Economics, India. He is associated with theIndia KLEMS research project as one of the Lead Researchersand also the project coordinator. His research interests are inarea of empirical international trade, labor market reforms andeconomics of productivity change. He has held visiting researcherpositions with Lancaster University, University of Manchesterand Australian National University and Lahore University ofManagement Sciences. He is the founder of the South AsianEconomics Students Meet- a platform for undergraduate studentsof South Asian colleges and universities.

Kumar Abhishek

Kumar Abhishekis currently a research scholar at Centre for Economic Studiesand Planning (CESP), Jawaharlal Nehru University, New Delhi.Prior to this he was associated with Indian Council for Researchon International Economic Relations (ICRIER) as researcher.In capacity as researcher at ICRIER he has been associatedwith projects supported and funded by the World Bank and 15thFinance Commission of India. His area of research interests arePublic Finance, Labour Economics, Industry and InternationalTrade. He completed his Masters in Economics from Delhi Schoolof Economics.

Prateek Kukreja

Prateek Kukrejais a Research Associate at theIndian Council for Research on International Economic Relations(ICRIER), New Delhi. He has over 5 years of research experienceand has previously been associated with various governmentand non-government organizations in India. His broad areas ofresearch interest include labour economics, trade and developmenteconomics. He has authored papers and articles in respectedjournals, newspapers and magazines and has also presentedpapers at various national and international conferences. Heholds an M.Phil. degree in Economics from the Jawaharlal NehruUniversity and a Masters degree from the South Asian University,New Delhi. He is currently pursuing his Ph.D. at Jawaharlal NehruUniversity.