Productivity and Elasticity Differential between Direct and Contract Workers in Indian Manufacturing Sector

Contractual employment is an increasing phenomenon in the in-house production while informal workers are available outside at low cost. The obvious question is: are they more productive? To enquire this, the present paper examines the elasticity and productivity differential between direct and contract workers using the three-digit industrial data for major Indian states during 1998–2006. A simple theoretical exercise suggests that when direct and contract workers are employed respectively for core and peripheral activities within in-house production, the use of contract workers could rise in response to technological change even if direct workers are more productive and decline. We assume that a firm can undertake core activities by subcontracting out in place of using direct employment. Our empirical results suggest that both elasticity and productivity of contract workers have been lower than those of direct workers, even when the share of contract workers is highly explained by the capital–output ratio. We argue that the contract workers are less productive because they do not receive direct benefits from the technological upgradation in core in-house activities. While the technological upgradation can replace direct workers and subcontracting, the contract workers to be used for peripheral in-house activities can increase along with in-house production.