Contract Labor and Firm Growth in India

46 Pages Posted: 16 Aug 2021 Last revised: 25 Feb 2023

See all articles by Marianne Bertrand

Marianne Bertrand

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Chang-Tai Hsieh

University of Chicago - Booth School of Business; University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Nick Tsivanidis

University of California, Berkeley

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Date Written: August 2021

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

Bertrand, Marianne and Hsieh, Chang-Tai and Tsivanidis, Nick, Contract Labor and Firm Growth in India (August 2021). NBER Working Paper No. w29151, Available at SSRN: https://ssrn.com/abstract=3905715

Marianne Bertrand (Contact Author)

University of Chicago - Booth School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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Chang-Tai Hsieh

University of Chicago - Booth School of Business ( email )

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University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Nick Tsivanidis

University of California, Berkeley ( email )

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