Short-term contracts and their effect on wages in Indian regular wage employment

Abstract

The increase in regular wage employment in the Indian economy between 2004–2005 and 2011–2012 was accompanied by a significant deterioration in job security; more workers found themselves on short-term and insecure contracts – a continuing trend. Insecurity of tenure results in a significant wage penalty for short-term workers, compared with those with longer term contracts. This article estimates the negative effect of short-term contracts on the wages of Indian regular wage workers all along the income distribution – unlike earlier studies – using the method of unconditional quantile regressions on data from the 68th round and the 61st round of the National Sample Survey Organisation on Employment covering the period 2004–2005 and 2011–2012. It finds that the wage penalty due to short-term contracts is higher for high-wage workers than for low-wage workers, with the maximum impact felt by median wage workers, and has increased for higher paid workers from 2004–2005 to 2011–2012. The spread of informal employment arrangements within India’s formal labour markets has resulted in an increasingly unequal distribution of workers’ access to the benefits of growth, reflecting a shift in power in favour of capital. These findings, specific to a developing economy like India, stand in contrast with studies in European countries, where high-wage workers do not face as much of a penalty for short-term contract work as low-wage workers. JEL Codes: J31, J41