Abstract This study aims to investigate the impact of contract labour on productivity in India’s formal manufacturing sector. Using unit-level panel data from 1999 to 2018, the analysis focuses on firms with varying levels of contract labour. Propensity score matching is employed to address sample selection bias and estimate the causal effect of contract labour on marginal productivity of labour (MPL) and total factor productivity (TFP). Results show that contract labour-intensive firms experience a 5.3% higher MPL and 5.9% higher TFP compared to their non-contract labour-intensive counterparts. However, the results vary significantly across major industry groups, with some industries experiencing a negative impact of contract labour intensity on firm productivity. The study highlights that over-reliance on contract labour may hinder long-term productivity by reducing human capital investment. The findings suggest that there is a need for policies like the Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) to promote formal employment and ensure sustainable productivity growth, balancing flexibility with human capital development. JEL Codes: J53; J24
Rather et al. (Mon,) studied this question.
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