Facts and myths on rise of contract
labour (The Hindu)
Mains Paper 5: Economy
Prelims level: Contract labour
Mains level: Rise and myth of contract labour
- There is an increased contractualisation of the workforce in
- It is essential to understand the reasons behind and take the
necessary measures to make it fair and favourable.
- The contract workforce share
- Contract workers are those who are not employed directly by the
employer, but by an intermediary/contractor on short-term contracts.
- Annual Survey of Industries (ASI) shows a surge in contract worker
usage in the organised manufacturing sector.
- There was an increase in total employment from 7.7 million to 13.7
million between 2000-01 and 2015-16.
- Of this, over half of the increase was accounted for by contract
- The share of contract workers in total employment increased
sharply from 15.5% in 2000-01 to around 28% in 2015-16.
- On the other hand, the share of directly hired workers fell from
around 61% to 50% over the same period.
Major implications highlights
- The rise in the use of contract workers indicates significant
informalisation of the organised workforce.
- Data from the Labour Bureau’s Employment-Unemployment Survey
(2015-16) brings out a social aspect to it.
- As per this, contract and casual workers have higher shares of
society’s vulnerable caste groups as compared to regular workers.
- The proliferation of such informal alternative work arrangements
deepens the labour market segmentation.
- It also has widespread ramifications for economic stability and
Is rigid labour law the reason?
- It is largely argued that the widespread use of contract labour is
because of India’s rigid employment protection legislations.
- E.g. Chapter V-B of the Industrial Disputes Act (IDA,1947)
- This makes it necessary for ﬁrms employing more than 100 workers
to obtain the permission of State governments to lay off workers.
- If labour regulations were the only factor driving
contractualisation, contract worker intensity should have increased largely
in labour intensive industries.
- This should have particularly been the case in States which have a
relatively rigid labour regulatory environment.
- But, over the last 15 years, contract worker usage has sharply
increased in capital-intensive and not in labour-intensive industries.
- Also, labour regulations in India have, in fact, become more
employer-friendly over the last 15 years and not more rigid as is proposed.
- E.g. amendments made by several State governments since 2015 to
raise the threshold to which IDA applies to 300 workers'
Reasons for contract worker intensity
- Contract workers receive roughly half the wages of those workers
employed directly by firms.
- Also, firms make significant savings by hiring contract workers as
they receive fewer employee benefits compared to regular workers.
- This enables firms to reduce costs and improve competitiveness.
- Also, the presence of contract workers acts as an alternative
workforce to the firms.
- This helps firms suppress the bargaining power of their regular
unionised workers and keep the wage demand of regular workers in check.
- Consequently, the real wages of the directly-employed regular
workers have remained almost stagnant over the last 15 years.
- So it is largely the profit motive that is driving firms’
decisions to hire contract workers.
- The Contract Labour Act prescribes that contract workers are
entitled to “same wages” for the same kind of work as regular workmen.
- It is thus important to ensure that wages of contract workers are
at par with directly hired workers.
- This is necessary not just for the benefit of contract workers,
but also for directly employed workers who have had meagre growth in their
- Further, now, contract workers should not be engaged in “core” and
“perennial” activities as per the law.
- However, with increasing substitution of regular workers with
contract workers and the changing nature of core and perennial activities,
there is an urgent need to review the Contract Labour Act.
- The provision of decent conditions of work and social security for
contract workers must be strictly adhered to.
Q.1) With reference to salient features of Mixed economy, consider the
1. There is co-existence of private and public sector.
2. Government intervenes for social welfare only.
3. Prices of all goods are determined by the market forces.
Which of the statements given above is/are correct?
(a) 2 and 3 only
(b) 1 only
(c) 1 and 2 only
(d) 1, 2 and 3
Q.1) What are the reasons behind rising the contract labour?