Size-dependent labour regulations and threshold effects: The Case of contract-worker intensity in Indian manufacturing

Labour regulations like employment protection legislation in India are size-dependent rules and therefore constitute a basis for threshold effects. Firms could use non-permanent workers to stay below the legal establishment size threshold of 100 workers. This strategy is expected to cause the ratio of non-permanent to total workers to peak at size close to the legal threshold size. The study is based on a large nationally representative unbalanced panel of manufacturing plants in the formal sector covering 25 states and 5 union territories of India spanning the period 1998-2008. The average contract-worker intensity of factories in size group 50-99 is found to be significantly higher in general and particularly in labour intensive industries located in states categorized as inflexible. Contrary to the job security enhancing intention of labour regulation the employment status of average workers in establishments close to or just above the threshold size appear to be more vulnerable.