Working Paper: NBER ID: w29151
Authors: Marianne Bertrand; Changtai Hsieh; Nick Tsivanidis
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.
Keywords: No keywords provided
JEL Codes: J23; J4; J5; O0; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased reliance on contract labor (M55) | Total Factor Productivity (TFP) (D24) |
| increased reliance on contract labor (M55) | employment flexibility (J62) |
| increased reliance on contract labor (M55) | firm dynamics (D21) |
| increased reliance on contract labor (M55) | innovation practices (O35) |
| increased reliance on contract labor (M55) | misallocation between large and small firms (E69) |
| increased reliance on contract labor (M55) | firm size (L25) |