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Import Competition, Formalization, and the Role of Contract Labor

Pavel Chakraborty, Rahul Singh and Vidhya Soundararajan

No 332157179, Working Papers from Lancaster University Management School, Economics Department

Abstract: Using the case of the Indian manufacturing sector and exploiting plausibly exogenous variation from Chinese imports, we provide causal evidence that higher import competition increases the share of the formal enterprise employment. We find an increase in the level of formal enterprise employment, driven by the high productivity firms, and in contrast, a fall in the informal enterprise employment. This labor reallocation is enabled by contract workers, who do not carry stringent ring costs. Our estimates imply that Chinese import competition led to an increase in the share of formal sector employment by 4.1 percentage points between 2000 and 2005. We calculate the labor productivity gap between the formal and informal sector, adjusting for differences in prices and worker characteristics and find them to be salient in explaining the observed gap. Our preferred estimate of the productivity gap implies an increase in labor productivity by 3.19% in response to Chinese import competition.

Keywords: Formal sector employment; Contract workers; Chinese import; Reallocation; Misallocation (search for similar items in EconPapers)
JEL-codes: F14 F16 F66 O17 O47 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-int and nep-iue
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