The same data provide evidence that large manufacturing organizations that use contract labor are more likely to pursue risky investments because “contract workers can be returned to the staffing companies at a lower cost if the investment does not succeed,” the researchers write. While companies with more than 100 employees must pay severance packages to any employee fired, contract workers can be laid off for essentially no cost.
More broadly, the researchers set out to estimate the effect of contract labor’s rise—to 1.3 million contract workers in 2014—on the Indian economy. They used the locations of staffing-agency hubs as a proxy for measuring the growth in contract-labor employment, using the initial location of staffing companies in 1998 to predict the growth in contract labor in manufacturing. Because of the geographic variation in the number of staffing agencies, the authors could measure the impact of contract-labor growth on a number of economic variables.
The rise in contract labor in the 2000s to 36 percent of total employment increased manufacturing output by 0.56 percent. This is noteworthy because India’s overall manufacturing GDP actually declined over the period, suggesting that contract labor provided India’s economy with much-needed stimulus. The researchers also demonstrate that the increased supply of contract labor over the time studied increased the number of new products manufacturing firms introduced and the amount of inputs they sourced.
The solution of using staffing agencies to avoid tough labor laws has proved to be good business for India’s manufacturing sector. The data suggest that large companies find contract work particularly helpful, as they are disproportionately able to reduce their marginal costs with contract workers.