Contract Employment as a Worker Discipline Device

39 Pages Posted: 2 Jul 2018

See all articles by Arnab K. Basu

Arnab K. Basu

College of William and Mary - Department of Economics

Nancy H. Chau

Cornell University - School of Applied Economics and Management; IZA Institute of Labor Economics

Vidhya Soundararajan

Indian Institute of Management (IIMB), Bangalore

Abstract

Fixed-term contract employment has increasingly replaced regular open-ended employment as the predominant form of employment notably in developing countries. Guided by factory-level evidence showing nuanced patterns of co-movements of regular and contract wages, we propose a two-tiered task based model with self-enforcing contracts in which firms allocate complex tasks to long term employees at incentive compatible wages, and routine tasks to fixed term employees at acceptable wages.We show that the advent of contract employment effectively lowers the cost of maintaining worker discipline, and demonstrate the conditions under which a positive change in labor demand can end up increasing the share of contract employees. We then argue that the contract employment phenomenon sheds light on two margins of hiring distortions – respectively task assignment and total employment distortions – against which the effectiveness of a suite of oft proposed labor market exibility policies should be assessed.

Keywords: contract employment, two-tiered labor markets, wage polarization

JEL Classification: J31, J41, O43

Suggested Citation

Basu, Arnab K. and Chau, Nancy H. and Soundararajan, Vidhya, Contract Employment as a Worker Discipline Device. IZA Discussion Paper No. 11579. Available at SSRN: https://ssrn.com/abstract=3205846

Arnab K. Basu (Contact Author)

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
United States
757-221-1318 (Phone)
757-221-1175 (Fax)

HOME PAGE: http://faculty.wm.edu/akbasu/

Nancy H. Chau

Cornell University - School of Applied Economics and Management ( email )

Ithaca, NY 14853
United States
607-255-4463 (Phone)
607-255-9984 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Vidhya Soundararajan

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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