The contractualisation of India's workforce: Explanations and implications

• The formal manufacturing sector in India has seen increasing informalisation through extensive hiring of contract workers, despite convergence between their wages and those of regular workers.
• We examined the factors that drive contractualisaton in the formal manufacturing sector and its potential implications for firm productivity.
• We found that while labour market rigidity contributes to the hiring of contract workers, firms also use contract workers to reduce the bargaining power of unionised workers.
• Hiring contract workers does not seem to have an adverse effect on firm productivity.
• In addition to policies promoting social security and job security, there is an urgent need for policies that promote skill creation and improvements in health and education.

There has been a steep rise in the numer of contract workers in India’s formal manufacturing sector over the last decade. This has generally been attributed to strict rules on firing workers. However, contractualisation has happened at the same time as increasing flexibility in the labour market. We explored what other factors account for rising informalisation in this sector.

In addition to relatively strict employment protection legislation, there is also a significant difference between the wages of contract and regular workers. Regular workers are paid substantially more than contract workers, although the gap is shrinking.

We found that besides labour market rigidities and the existence of a wage differential between contract and regular workers, firms appear to be using contract workers to their strategic advantage against unionised regular workers. Firms use contract workers to keep unions’ bargaining power and wage demands in check.

Increasing contractualisation of the workforce in the formal manufacturing sector raises doubts about the sustainability of employment growth, because contract workers can be shed easily. It also reflects deterioration in the standard of jobs generated.

Popular policies such as the universalisation of minimum wages for contract workers may aggravate the problem by creating more informal jobs and increasing regional disparities. Currently, the minium wage for regular workers varies by state, whereas the minimum rate for contract workers will be the same nationally. This might result in jobs moving from smaller states, which have low minimum wages, to those states where the minimum wage is equal to the minimum wage for contract workers.

Policies promoting social security and job security are required. These should be supplemented by policies supporting skill creation and improvements in health and education.