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Contract Labor and Firm Growth in India

Author

Listed:
  • Marianne Bertrand
  • Chang-Tai Hsieh
  • Nick Tsivanidis
Abstract
India's Industrial Disputes Act (IDA) of 1947 requires firm with more than 100 workers to pay large costs if they shrink their employment. Since the early 2000s, large Indian manufacturing firms have increasingly relied on contract workers who are not subject to the IDA. By 2015, contract workers accounted for 38% of total employment at firms with more than 100 workers compared to 20% in 2000. Over the same time period, the thickness of the right tail of the firm size distribution in formal Indian manufacturing plants increased, the average product of labor for large firms declined, the job creation rate for large firms increased, and the probability that large firms introduce new products rose. We provide evidence that these outcomes were caused by an increased reliance on contract labor among large establishments. A model of firm growth subject to firing costs suggests the rise of contract labor increased TFP in Indian manufacturing by 7.6%, occurring all through a one-time reduction in misallocation between large and small firms with negligible change in the long-run growth rate.

Suggested Citation

  • Marianne Bertrand & Chang-Tai Hsieh & Nick Tsivanidis, 2021. "Contract Labor and Firm Growth in India," NBER Working Papers 29151, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29151
    Note: DEV EFG LS PR
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    Citations

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    Cited by:

    1. Das, Jishnu & Joubert, Clément, 2023. "Women in the pipeline: A dynamic decomposition of firm pay gaps," Labour Economics, Elsevier, vol. 80(C).
    2. Farrokhi, Farid & Lashkaripour, Ahmad & Pellegrina, Heitor S., 2024. "Trade and technology adoption in distorted economies," Journal of International Economics, Elsevier, vol. 150(C).
    3. Bujunoori, Raja Reddy & Mannil, Nithin & Tantri, Prasanna, 2024. "Does labor composition impact the transmission of monetary policy to output?," Journal of Development Economics, Elsevier, vol. 167(C).

    More about this item

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J4 - Labor and Demographic Economics - - Particular Labor Markets
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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