The industrial disputes act and the incidence of contract labor in india

Abstract

In this paper, I try to gauge the impact of India’s employment protection legislation on the incidence of contract workers in the country’s manufacturing sector. India’s Industrial Disputes Act (IDA) of 1947 requires any firm employing more than 100 workers to obtain government approval to lay off any worker. This provision has increasingly been associated with the growing incidence of contract labour in the country’s labour market. In this paper, I hypothesise that the share of contract workers in the firms’ workforce should display a statistically significant increase after crossing the threshold of 100 workers. In order to test this hypothesis, I use a regression discontinuity design (RDD) and compare the share of contract workers for firms employing between 85 and 115 workers. I also compare the firm level performance of workers for firms with differing shares of contract workers in their workforce. I hypothesize that productivity and value addition should show a statistically significant decline and increase respectively with an increase in the share of contract workers. I utilized three models based on an OLS design in order to test my hypothesis. Contrary to my hypothesis, I find that the share of contract workers in the firms’ workforce declines above the threshold of 100 workers. Also, there were no statistically significant differences in worker performance between firms with differing numbers of contract workers.