The Productivity Impact of Contract Work in India: An Establishment Level Structural Approach

Third-party labour market intermediaries, often simply known as subcontractors, are responsible for over 65% of the man days hired in Indian manufacturing in the last decade (Ramaswamy, 2013; Soundararajan, 2015) and have been growing in importance also in many low income countries (Powell and Skarbek, 2006). Over 50% of the knitwear factories in Bangladesh, for example, uses contract labour (Chan, 2013). These labour market intermediaries are popularly seen as a cost saving device to sidestep labour market’s regulations governing hiring and firing (Chan, 2013; Barrientos, 2008; Barrientos, 2011; Rajeev, 2006), even though at the potential cost of day-to-day erosion of worker morale (Panagariya, 2004), or outright work disruption due to strikes and labour disputes (Seghal, 2012; Gulati, 2012). On balance, that is, taking into account the potential benefits and the potential costs, what is the productivity impact of contract labour at the firm level? What forms should policy intervention targeting the hiring practice of private enterprises take?

This project diverges from other existing papers that estimate static productivity effects focusing on one-period models, overlooking plausible lagged productivity response as worker morale take time to change, for example (Hirsch and Mueller, 2010; Bryson, 2013). The researchers will build a multi-period dynamic profit maximization model of firms, to ascertain the evolution of productivity changes over time. They will single out and differentiate between two distinctive channels through which contract workers could potentially affect productivity: (i) a human capital channel, wherein persistent usage of contract workers potentially inhibits firm-specific human capital accumulation, (ii) a fairness channel so far overlooked in the literature, wherein workers’ effort depend explicitly on whether they deem the wage they receive as fair (Akerlof and Yellen, 1998). The researchers’ contention is that these conspicuously inequitable conditions of work, the consequent low morale and silent resistance by workers (Panagariya, 2004) also inhibit productivity.

It has been documented that contract workers across the world are paid below minimum wage, have little job security and have poor labour market and social mobility (Bandari and Heshmati, 2006; Barrientos, 2011; Chan, 2013). Recent fatalities in the garment industry in Bangladesh left hundreds injured and dead with no clear responsibilities assigned due to lack of targeted legislation. This project directly addresses and impacts the policy discourse concerning the hiring practices of private enterprises in the subcontinent that so far focused mainly on regulatory rigidities and the resultant firm-level outcomes (Besley and Burgess, 2004; Ahsan and Pages, 2009; Bhattacharjea, 2006): to date the direct impact of contract labour on productivity is unknown. The findings will shed new light on the productivity impact of contract work as a means to circumvent policy induced labour market friction, and inform policy debates on the need for social compliance among private enterprise in low income countries.


Nancy H. Chau

Cornell University

Vidhya Soundararajan

Indian Institute of Management Bangalore