New Delhi: Contract workers are an increasingly important component of India’s labour force. The latest data from the Annual Survey of Industries (ASI) suggests that more than half of the nation’s factory workers are employed on contract. They enjoy fewer privileges than regular employees, which can fuel conflict on the shop floor and spur discontent in industrial belts.

One obvious solution to avoid such problems is to simply ban firms from hiring contract workers for core activities. This is what Andhra Pradesh did in 2003 and new research suggests that while the ban did reduce contract employment, it also affected firm performance.

In a paper presented at a conference last month, Ritam Chaurey and Vidhya Soundararjan used plant-level ASI data between 1999 and 2008 to measure the impact of a reform in Andhra Pradesh which prohibited firms from engaging contract workers in their core activities. They compare firms’ employment data before and after the reform and then with neighbouring states.

They find that the ban worked: contract workers usage fell as more regular workers were hired for firms’ core activities. Regular workers are usually more skilled than contract workers and to complement them, firms also invested more in plant and machinery. There was also a marginal increase in firm productivity. However, while capital investment and productivity increased, output went down and costs went up since regular employees cost more. As a result, revenue and profits declined. According to the authors, another way to improve employment protection and reduce contract worker hiring would be to change the cost of firing workers—but that, too, could affect firm’s performance. The authors suggest policymakers should take into account these impacts while designing or amending labour policies.

Also Read: Banning Contract Work: Implications for Input Choices and Firm Performance