Contract Labor and Firm Growth in India

Marianne Bertrand, Chang-Tai Hsieh and Nick Tsivanidis

No 29151, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: J23 J4 J5 O0 O4 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-bec, nep-cwa, nep-isf, nep-lab and nep-tid
Note: DEV EFG LS PR
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Citations: View citations in EconPapers (6)

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