Banning contract work: Implications for input choices and firm performance

Description

This paper examines the effects of an outright ban on fixed-term contract workers in manufacturing establishments. By strengthening job security, such policies can influence total employment, firms’ investment decisions, and ultimately overall productivity and profitability. We analyze a natural experiment in the Indian state of Andhra Pradesh, which prohibited the use of contract workers in core manufacturing activities. Using plant-level panel data from the Annual Survey of Industries, we find robust evidence of a substantial decline in the use of contract labor in core activities, accompanied by a modest but statistically significant increase in the employment of regular workers in these roles. The policy also led to an increase in capital usage, along with a small improvement in total factor productivity. However, revenue and profits declined significantly, likely reflecting higher input costs associated with substituting contract labor with regular employees. Placebo tests provide further support for our findings: there is no evidence of changes in contract or regular labor usage in non-core activities, which were not affected by the policy, nor are there any observable pre-trends prior to the law’s implementation. Additionally, we find no evidence of firm closures or spillover effects to neighboring states.

Publication Date

1-1-2019

Keywords

Fixed Term Contracts, Contract labor, Employment protection laws, Firm behavior.

Conference

North-eastern Universities Development Consortium (NEUC), October 2018

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