© Springer Nature Switzerland AG 2021

Klaus F. Zimmermann
Handbook of Labor, Human Resources and Population Economics
10.1007/978-3-319-57365-6_82-1

Contract Labor in Developing Economies

Arnab K. Basu1 , Nancy H. Chau1 and Vidhya Soundararajan2

(1)Cornell University, Ithaca, NY, USA

(2)Indian Institute of Technology Bombay, Bombay, India

Arnab K. Basu
Email: arnab.basu@cornell.edu

Nancy H. Chau (Corresponding author)

Email: hyc3@cornell.edu

Vidhya Soundararajan
Email: vidhyasrajan@iitb.ac.in

Abstract
Contract employment has become an iconic feature of labor markets in many countries worldwide.
These are workers employed at a fixed-term or fixed task basis often times via employment
intermediaries. Contract workers typically confront inferior benefits relative to workers with open-
ended contracts and no access to severance payments in the event of job termination. This chapter
surveys the contract employment literature with a focus on developing country labor markets. It
begins with some of the rationales that have guided the popularity of contract developing countries
often do not conform to the timeworn definition of good jobs, namely, open-ended employment at
prescribed wage and benefit trajectories depending on performance, and a severance package in the
event of dismissal. Quite the contrary, workers in developing countries confront job insecurity,
uncertainty with respect to wages and benefits, and poorly enforced employment protection laws.
This chapter explores the findings of a growing literature on the economics of contract employment
in developing countries.
A contract worker is one who is employed at a fixed-term or fixed-task basis. Such temporary labor
arrangements are often routinely renewed as consecutive fixed-term jobs with no explicit guarantee,
whether contractual or legal, of subsequent regular employment. In addition to job insecurity,
contract workers are often not entitled to the benefits, both on-the-job and at separation, afforded to
employees with open-ended contracts. Contract employment relationships often involve multiple
parties, such as employment agencies/subcontractors, and these conditions can have additional wage
and benefits implications that extend beyond the temporariness of employment. Researchers have
applied a plethora of terminologies such as fixed-term work (e.g., Eichhorst 2014), in-contracted
work (Fair Wear Foundation 2014), subcontracted work (e.g., ILO 2016), triangular employment
(e.g., ILO 2016), two-tiered labor markets (e.g., Boeri 2011), and fissured work arrangements (Weil
2014), for example. While these work arrangements are prevalent in manufacturing employment,
seasonal/casual employment is commonplace in agriculture as well (e.g., Bardhan 1979; Eswaran
and Kotwal 1985). More recently, the International Labour Organization (ILO) summarily refers to
these forms of employment as non-standard forms of employment (ILO 2016).
Research on contract employment is not new. Early studies were inspired by efforts to revive labor
markets where strong employment protection laws – such as guarantees of high minimum wages
protected by regulated severance or redundancy payments – constrain employers’ ability to fashion
hiring, firing, and/or wage adjustments in response to market uncertainties and changes in policy
priorities (Saint Paul 1996; Cahuc and Postel-Vinay 2002; Bentolila et al. 2011; Boeri 2011). Other
studies demonstrate the need for policy measures to enhance labor market flexibility notably in some
European labor markets, where labor market regulations related to employment protection were
often considered a deterrent to the efficient use of resources and economic growth (OECD 2004,
2006; ILO 2012). In this context, a two-tiered labor market structure with contract and regular
employees offers firms the flexibility to hire workers when needed, while allowing workers with
existing open-ended employment to enjoy the benefits of such contracts. Contract employment was
thus deemed attractive both in terms of efficiency and political feasibility (Saint Paul 1996). There is
extensive research in this area, ranging from issues such as the implication of permitting contract
employment on overall employment based on country-specific experiences, employment transitions,
and productivity at the firm level (Eichhorst 2014; Boeri 2011).
By contrast, the emerging literature on contract employment in developing country labor markets
confront several stylized views of developing country labor markets that differ from that of their
developed country counterparts. First, labor regulation enforcement in developing country labor
markets is often imperfect, and as such, noncompliance to policies meant to maintain wage floors
and other workplace standards is widespread (Almeida and Ronconi 2016; Soundararajan 2019;
Basu et al. 2016). Meanwhile, unions and collective bargaining play a small role in determining
employment and wages in these countries (Freeman 2010). As such, the rationale that firms must
resort to contract employment to evade the high labor cost associated with well-enforced
employment protection legislation is arguably weaker. In these labor markets, the question is not just
why firms hire contract workers, but more to the point, what are the drivers other than wage cost
savings that may have induced firms to employ a combination of regular open-ended and contract
workers? Second, the seasonality of production (e.g., textiles, agriculture) and the associated
uncertainties have meant that seasonal contract employment is a mainstay (Sanghavi 1969; Bardhan
1979; Eswaran and Kotwal 1985; Basu 2002). Regular/open-ended labor contracts in these
circumstances are expected to be profit-maximizing because they embody an implicit risk-sharing
promise to protect workers in times of adverse demand shock where alternative social safety nets are
in short supply. What role does employment protection legislation play in building employers’
credibility to not renege on their implicit promises?
With these varied and nuanced rationales for hiring workers on a fixed-term basis, it should therefore
come as little surprise that labor market regulations related to contract employment across
developing economies are highly heterogeneous. This chapter explores these differences in contract
employment-related regulations and examines existing and new research directions that address
several questions: What determines the wage gap between contract and regular workers? Is there an
over- or under-supply of contract work if labor markets are left unregulated? What forms, if any,
should labor market policy take?
This chapter will begin by canvassing the legal frameworks that govern contract labor employment
across countries globally, contrasting multinational and country-specific frameworks. Next, this
chapter presents a review of the scope of contract employment in developing country labor markets.
The nature of contract employment in terms of wages and worker-level and employer-level
outcomes will be discussed. As is well known, labor market regulations are rooted in factors specific
to the legal origins of a country (Botero et al. 2004; LaPorta et al. 2008). Other factors related to
global linkages, such as trade orientation and peer effects, have also been studied (Chau and Kanbur
2001; Neumayer and de Soysa 2006). Thus, rather than attempting to paint broad conclusions, this
chapter will survey regional and country-level studies to draw out any case-specific nuances and
insights. The experiences of three regional country groupings will follow, including South Asia, East
Asia, and Latin America. Findings of recent cross-country studies that include developing
economies will also be discussed. This chapter will then turn to three recent theoretical perspectives
and prospective areas for future research.

The Legal Landscape

Currently, there are no international conventions in force that define and regulate the employment of
contract workers, broadly defined. Some ILO Conventions contain provisions related to issues that
may arise related to the implementation of key labor standards in the presence of contract workers.
Furthermore, an ILO convention covering a subset of contract-employed workers also exists,
namely, the Convention on Private Employment Agencies (C181).
Article 4 of the 1982 Termination of Employment Convention (C 158, 1982) of the ILO states that
“[t]he employment of a worker shall not be terminated unless there is a valid reason for such
termination connected with the capacity or conduct of the worker or based on the operational
requirements of the undertaking, establishment or service.”
Article 2 of the Convention lays out possible exclusions depending on the nature of the employment
contract. Specifically, a
Member may exclude the following categories of employed persons from all or some of the
provisions of this Convention: (a) workers engaged under a contract of employment for a
specified period of time or a specified task; (b) workers serving a period of probation or a
qualifying period of employment, determined in advance and of reasonable duration; (c)
workers engaged on a casual basis for a short period.
Safeguards are required by the same article, thus recognizing the needs for care to be taken
against recourse to contracts of employment for a specified period of time the aim of which is
to avoid the protection resulting from this Convention.
As of the writing of this chapter, C158 is ratified and in force in 36 countries. The Convention of
Private Employment Agencies (C181) sets out to define the types of employment contracts that
come under the definition of the term private employment agency. To date, 32 countries have
ratified this convention. Article 4 of the convention states that workers employed by private
employment agencies should not be denied the right of freedom of association and the right to
bargain collectively. In addition, article 11 of the Convention requires that signatories to the
convention will ensure the rights of workers in the areas of minimum wages, working time and
conditions, statutory social security benefits, access to training, occupational safety and health,
compensation in case of occupational hazards or insolvency, as well as maternity protection, with
the important proviso that these measures are implemented
in accordance with national law and practice, take the necessary measures to ensure adequate
protection for the workers employed by private employment agencies.
Turning now to national laws and practices, Table 1 displays the list of countries where fixed-term
employment for permanents tasks is prohibited and the complementary list where fixed-term
employment for permanents tasks is legal, using data from the World Bank Doing Business
Indicators for 2018. It is by now well-known (Botero et al. 2004) that a country’s inherited legal
origin can play an critical role in determining the degree of labor market regulation, in particular,
common law countries exhibit lower levels of labor market regulations than Socialist, French, or
Scandinavian legal traditions. Accordingly, Table 1 classifies countries based on their legal origins
(LaPorta et al. 2008). Table 1 also separately lists countries depending on their level of development
in 2018 according to the classification in the World Development Indicators for that year. Table 2
uses the same format and lists countries based on national legislation on the maximum duration of
fixed-term contracts.Table 1
Ban on fixed-term contracts on permanent tasks

Fixed term contracts on permanent Fixed term contracts on permanent

tasks permitted tasks prohibited

Developed economies

Legal origin N = 45 Legal origin N = 17

Antigua and
Barbuda, Australia,
Bahamas, The
Bahrain, Barbados,
Bermuda, Brunei
Darussalam,
Canada, Cyprus,
Hong Kong SAR,
English China, Ireland, English
Israel, New Zealand,
Saudi Arabia,
Singapore, St. Kitts
and Nevis, Trinidad
and Tobago, United
Arab Emirates, the
United Kingdom,
the United States

Belgium, Chile, France, Greece,

Italy, Malta, the Luxembourg,
French Netherlands, Oman, French Panama,
Puerto Rico, Qatar, Portugal, San
Seychelles, Uruguay Marino, Spain

Czech Republic,
Hungary, Lithuania, France, Greece,
Socialist Socialist Luxembourg,
Poland, Slovak
Republic Panama,
 Portugal, San
Marino, Spain

Austria, Germany,
German Japan, Korea, Rep., German Taiwan, China
Switzerland

Denmark, Iceland,
Scandinavian Scandinavian Finland
Norway, Sweden

Developing economies

Legal origin N = 75 Legal origin N = 61

Bangladesh, Belize,
Bosnia and
Herzegovina,
Botswana,
Dominica, Eswatini,
Fiji, Gambia, The
Ghana, Guyana,
India, Jamaica,
Kenya, Kiribati,
Bhutan, Grenada,
Lesotho, Liberia,
Malawi, Nepal,
Malaysia, Maldives,
Pakistan, Sierra
English Marshall Islands, English
Leone, South
Micronesia, Fed.
Africa, Tanzania,
Sts, Namibia,
Thailand, Zambia
Nigeria, Papua New
Guinea, Samoa,
Solomon Islands,
Somalia, Sri Lanka,
St. Lucia, St.
Vincent and the
Grenadines, Sudan,
Tonga, Uganda,
Vanuatu, Zimbabwe

Afghanistan, Algeria,
Angola, Benin, Argentina, Brazil,
Burkina Faso, Cabo Verde,
Burundi, Cameroon, Central African
Chad, Colombia, Republic, Congo
French Comoros, Côte French Rep., Costa Rica,
d’Ivoire, Egypt, Djibouti,
Arab Rep., Gabon, Dominican
Guinea, Haiti, Iran, Republic,
Islamic Rep., Ecuador, El
Jordan, Lebanon, Salvador,
Libya, Mauritania, Equatorial
 Mauritius, Guinea, Eritrea,
Nicaragua, the Ethiopia, France,
Philippines, Greece,
Rwanda, Suriname, Guatemala,
Syrian Arab Guinea-Bissau,
Republic, Tunisia, Honduras,
Yemen, Rep. Indonesia, Iraq,
Luxembourg,
Madagascar,
Mali, Mexico,
Morocco,
Mozambique,
Niger, Panama,
Paraguay, Peru,
Portugal, San
Marino, São
Tomé and
Principe,
Senegal, Spain,
Turkey,
Venezuela, RB

Albania,
Armenia, Croatia,
Estonia, Kyrgyz
Azerbaijan, Belarus, Republic, Latvia,
Bulgaria, Cambodia, Moldova,
China, Georgia, Romania,
Socialist Socialist
Kazakhstan, Lao Russian
PDR, Mongolia, Federation,
Myanmar, Vietnam Slovenia,
Tajikistan,
Ukraine,
Uzbekistan

German German

Scandinavian Scandinavian

Source: Authors’ calculation based on World Bank Doing Business Indicators and LaPorta
et al. ( 2008)
Table 2
Duration limits on fixed-term employment

No limit More than 24 months Up to 24 months

High income economies ( N -59)

Legal N= Legal Legal
N = 16 N = 11
origin 32 origin origin

Antig
ua and
Barbu
da,
Austra
lia,
Baha
mas,
The,
Barba
dos,
Berm
uda,
Brune
i
Darus
salam,
Canad
a,
Hong
Kong
SAR
China,
Irelan Bahrai
d, n,
Englis Englis Englis
Israel, Cyprus
h h h
New , Saudi
Zeala Arabia
nd,
Singa
pore,
St.
Kitts
and
Nevis,
Trinid
ad and
Tobag
o,
Unite
d
Arab
Emira
tes,
the
Unite
d
Kingd
om,
the
Unite
 d
States

Belgiu
Chile,
m,
France
Greec
,
e,
Luxem
Oman
Italy, bourg,
,
Malta, the
French Puerto French French
Portug Nether
Rico,
al lands,
Qatar,
Panam
Seych
a, San
elles,
Marin
Urugu
o
ay

Czech
Republ
ic,
Estoni Slovak
a, Repub
Sociali Croati Sociali Sociali
Hunga lic,
st a st st
ry, Sloven
Latvia, ia
Lithua
nia,
Poland

Austri
a,
Germ Korea
Germa any, Germa Switze Germa Rep.,
n Japan, n rland n Icelan
Taiwa d
n
China

Finlan
Scandi Denm Scandi d, Scandi Swede
navian ark navian Norwa navian n
y

Developing economies ( N = 123)

Legal N= Legal Legal

N = 29 N = 23
origin 71 origin origin
 Bangl
adesh,
Belize
,
Botsw
ana,
Domi
nica,
Eswat
ini,
Fiji,
Gamb
ia,
The,
Ghana
,
Grena
da,
Guyan
a,
India,
Jamai
ca,
Kenya
, Bhuta
Kiriba Bosnia n,
ti, and Maldi
Englis Lesot Englis Englis
Herzeg ves,
h ho, h h
ovina, Pakist
Liberi Sudan an, St.
a, Lucia
Mala
wi,
Malay
sia,
Marsh
all
Island
s,
Micro
nesia,
Fed.
Sts.,
Nami
bia,
Nepal,
Nigeri
a,
Papua
New
Guine
a,
Samo
a,
Sierra
Leone
 ,
Solom
on
Island
s,
Somal
ia,
South
Africa
, Sri
Lanka
, St.
Vince
nt and
the
Grena
dines,
Tanza
nia,
Thaila
nd,
Tonga
,
Ugand
a,
Vanua
tu,
Zambi
a,
Zimba
bwe

Afgha Angol Brazil,

nistan, a, Centra
Algeri Argent l
a, ina, Africa
Burki Benin, n
na Cabo Repub
Faso, Verde, lic,
Burun Camer Congo
di, oon, , Rep.,
Colo Chad, Costa
mbia, Comor Rica,
French Domi French os, French Côte
nican Gabon, d’Ivoir
Repub Indone e,
lic, sia, Djibou
Ecuad Libya, ti,
or, Mali, Equato
Egypt, Moza rial
Arab mbiqu Guine
Rep., e, a,
El Niger, Guine
Salva Peru, a,
dor, São Guine
Eritre Tomé a-
 a, and Bissau
Ethiop Princip ,
ia, e, Hondu
Guate Syrian ras,
mala, Arab Iraq,
Haiti, Republ Leban
Iran, ic, on,
Islami Tunisi Madag
c a ascar,
Rep., Maurit
Jordan ania,
, Maurit
Mexic ius,
o, Moroc
Nicara co,
gua, Seneg
Parag al,
uay, Venez
the uela,
Philip RB
pines,
Rwan
da,
Surina
me,
Turke
y,
Yeme
n,
Rep.

Azerba
Alban ijan,
ia, Bulgar
Arme ia,
nia, Georgi
Belaru a,
s, Kyrgy
China, z
Kazak Republ
hstan, ic, Lao
Sociali Sociali Sociali
Moldo PDR,
st st st
va, Roman
Mong ia,
olia, Russia
Myan n
mar, Federa
Tajiki tion,
stan, Uzbeki
Ukrai stan,
ne Vietna
m
 Germa Germa Germa
n n n

Scandi Scandi Scandi

navian navian navian

Source: Authors’ calculation based on World Bank Doing Business Indicators and LaPorta
et al. ( 2008)
At the country level, Tables 1 and 2 both display a pattern consistent with Botero et al. ( 2004).
Indeed, all common-law high-income economies and most common-law developing economies
permit the use of fixed-term contracts on permanent tasks. Furthermore, only a select few common
law countries, regardless of the state of development, impose any limit at all on fixed-term
employment. The same is not true for the rest of the countries, where significant differences with
respect to the adoption of labor regulations related to contract employment exist.
It is important to note that this discussion on the legal landscape of contract employment only
scratches the surface of the layers of challenges facing enforcement agencies. To illustrate with two
examples, in an informative account, Chung ( 2017) documents a pervasive issue confronting fixed-
term employees in Hong Kong. The study documents a landmark determination of the Court of
Appeal in Hong Kong, which ruled on the legality of seeming strategic manipulation of a worker’s
employment contract duration, by repeatedly hiring the same worker with fixed-term contracts. This
leaves the employer with no legal obligation to provide severance pay upon the departure of its
longstanding employees. Another practical difficulty involves how to define fixed-term workers on
the ground. For example, there are multiple categorizations of flexibly employed workers that do not
qualify as regular full/part-time workers, including direct-hire temporary workers, fixed-term
contract workers, subcontractor or subcontracting workers, as well as dispatched workers. In these
multi-party employment relationships (ILO 2015), with often multiple layers of subcontracting, at
which layer do contract employment regulations bind?
In the following sections, this chapter turns to the economics of contract employment, covering the
scope of the phenomenon and studies regarding the causes and implications of contract employment.

The Scope, Nature, and Motivations of Contract

Employment

Extent of Contract Work

The definition of contract employment can vary from context to context. Publicly available datasets
often lack details about the type of contract employment covered. For example, available statistics
seldom include information on whether third party employment agencies are involved. Even
temporary employment per se may be differently defined across countries. Definitions may also
change within a country over time (Maurizio 2016). With this caveat in mind, Table 3 presents data
on the temporary workers as a fraction of wage employees in select developing and developed
countries where data are available.Table 3
Temporary workers as a share of wage employees

Developing economies

Percentage
(s)

s < 10% Algeria, Armenia, Brazil, Bulgaria, Latvia, Romania, Russian Federation,

30% > s >

Argentina, Chile, El Salvador, Indonesia, Mexico, the Philippines
10%

50% > s >

Bahrain, Cambodia, El Salvador, India, Mali, Niger
30%

70 > s >
Ecuador, Ethiopia, Peru, Uganda, Tanzania, Vietnam, Zambia
50%

>70% Pakistan

High-income economies

Percentage
(s)

Austria, Australia, Belgium, Czech Republic, Denmark, Estonia, Hungary, Iceland

s < 10% Ireland, Japan, Lithuania, Luxembourg, Malta, the United Kingdom, the United
States

30% > s > Canada, Crotia, Cyprus, Finland, France, Germany, Greece, Italy, the Netherlands,
10% Poland, Portugal, Slovakia, Slovenia, Sweden, Switzerland, Rep. of Korea

50% > s >

Poland
30%

70 > s >
Spain
50%

>70%
Source: Authors’ tabulation based on ILO 2016
As shown, at one end of the spectrum, temporary employment is but a minor share of total wage
employment. For example, in Romania, this share is less than 5%, while in Brazil the figure is higher
but still below 10%. At the other extreme, temporary employment constitutes more than 50% of
wage employment in several developing countries. These include Ecuador, Ethiopia, and Pakistan,
respectively, in between 50% and 60%, between 60% and 70%, and greater than 70% categories.
These levels of temporary employment equal to and often exceed high-income country figures
shown in Table 3, where, as noted before, employment protection legislations, if in place, are likely
better enforced.
Studies on temporary employment at the firm level show a more nuanced picture, offering insights
not just on the scope but also on the firm-level mixes of regular and contract workers. Aleksynska
and Berg ( 2016) explore the findings of the World Bank Enterprise Survey comprising of data on
73,000 firms from multiple countries. The study shows that 40% of these firms recorded having
employed temporary workers. Of these, 18% employed more than 50% of their workforce using
temporary contracts, averaging 63% among firms using contract workers.
In India, co-employment of regular and contract labor is a longstanding feature among Indian firms.
The intensity of contract employment has increased from negligible levels to 35% in recent years,
based on data from the Annual Survey of Industries of India (Srivastava 2016; Soundararajan 2015).
Notably, India has also witnessed many high profile labor disputes in recent years at times with
tragic consequences (Seghal 2012; Gulati 2012).
In Korea, Eun ( 2011) documents the results of a 2008 Survey on in-house subcontracting and found
that over half of all the firms surveyed employed subcontracted workers. In some of these firms,
notably large firms in steel and automobile industries and increasingly in other manufacturing and
public sector industries, over 50% of the workforce were subcontracted. As in India, subcontracting
is an important reason behind multiple high-profile labor disputes in South Korea and a key cause of
wage polarization within the workforce (Eun 2011).

Worker Outcomes
By definition, due to the fixed-term nature of their employment, contract workers do not enjoy job
security. In addition, contract workers often endure a wage penalty. In the manufacturing sector, the
wage penalty ranges from 30% to 60% in developing countries and 1 to 34% in developed countries
(ILO 2015) without controlling for worker and firm characteristics. Even after controlling for
employer, employee, and labor market-related variables, the contract worker wage penalty has been
shown to persist in developed (Goldschmidt and Schmieder 2017) and developing country labor
markets (Duman 2019). Recent research has also unveiled a negative stigma effect that a history of
temporary employment can have on workers’ earnings in subsequent employment opportunities
(Jahn and Pozzoli 2013).
The simultaneous wage penalty and job insecurity that contact workers confront are an apparent
violation of the Smithian compensating differential, where workers are only willing to endure subpar
employment conditions when they are compensated in the form of higher wages. Indeed, ILO (
2016) and Schmid and Wagner ( 2017) present survey evidence indicating that temporary
employment is an involuntary decision, and workers only undertake these jobs when access to better
alternatives is not attainable.
Still, other studies find additional worker-level implications of temporary employment. These are by
and large based on developed country evidence, however, mainly due to the non-availability of
worker-level panel data that also carry information on contractual status in developing countries.
These findings are nonetheless instructive here as they serve as cues to the potential set outcomes
that may be impacted by contract employment status even in developing countries. Auer and Danzer
( 2016) use data from the German socioeconomic panel to demonstrate that there are adverse fertility
implications when a worker’s first job is fixed-term, leading to delayed fertility decisions and
reduced number of children, particularly for the least skilled women. De la Rica and Iza ( 2005) use
data from the European Household Panel for Spain and find that a history of temporary jobs is
associated with delayed marriage by male workers. Women, on the other hand, have been found to
delay entering into parenthood after a history of holding temporary jobs. The effect is particularly
significant and larger for unmarried women. Overall, contract employment has also been shown to
offer lower levels of worker satisfaction (Chadi and Hetschko 2016).
Finally, there is an extensive literature on whether temporary employment is treated as a stepping
stone to subsequent open-ended employment (Blanchard and Landier 2002; Belot et al. 2007;
Faccini 2013). Autor and Houseman ( 2010) show in the context of the Detroit welfare-to-work
program that temporary job placements do not improve future employment prospects. Quite the
contrary, participants experience diminished subsequent earnings and employment. This suggests
that while temporary employment may guarantee faster access to paid jobs, the long-term labor
market implications associated with such jobs may well be negative. In the context of Spain, García-
Pérez, Marinescu, and Castello ( 2019) use Spanish social security data to assess the impact of fixed-
term contract regulation on long-term employment prospects. Based on results from an analysis
using a cohort discontinuity design, the study finds that a 1984 reform that liberalized the use of
fixed-term contracts in Spain led to significant losses in subsequent workdays and labor earnings.
Güell and Petrongolo ( 2007) find, also in the context of Spain, that once in a temporary contract,
workers are deterred by a lack of skill upgrading and tend to carry on the temporary employment
status.
By contrast, Faccini ( 2013) examines temporary employment as a screening device. Simulation of a
search theoretic model shows that if learning about match quality can drive separations, fixed-term
employment can lower unemployment and offset the efficiency cost of employment protection. In
the United Kingdom, Booth, Francesconi, and Frank ( 2002) present evidence using seven waves of
the British Household Panel Survey from 1991 to 1997, demonstrating that fixed-term contracts are
indeed stepping stones to open-ended positions, even though such jobs typically offer less job
satisfaction, worker training, and remuneration. Consistent with this theme, Engellandt and Riphahn
( 2005) use indicators of unpaid overtime work and absences based on the Swiss Labor Force Survey
and find that temporary workers provide more effort than permanent employees. De Graaf-Zijl, van
den Berg, and Heyma ( 2011) use a longitudinal dataset collected by the Dutch Institute for Labour
Studies from 1988 to 2000 and a multi-state durations empirical model to show that temporary
employment decreases the unemployment duration of workers. Ichino et al. ( 2008) propose a
sensitivity analysis to assess the conditional independence assumption on whether selection into
temporary jobs is indeed driven by observable worker attributes up to a random factor. The study
finds in the case of Italy that temporary employment can indeed provide a stepping stone to more
open-ended employment prospects.

Employer Outcomes
For employers, improvements in hiring flexibility through contract employment can serve several
functions. First, the hiring of contract or temporary workers through intermediaries can offset
production costs, including the cost of dismissals and closures, and wage costs and the bargaining
power of unions. Here as well, evidence in the developing country context is thin relative to
developed country studies. A notable exception is Saha, Sen, and Maiti ( 2013). The study presents a
theory and empirical evidence from the Indian context showing the cost-saving motive of contract
employment. By contrast, several studies in developed countries have demonstrated the importance
of this cost-saving motive (Abraham and Taylor 1996; Autor 2013; Blanchard and Giavazzai 2003;
Kahn 2010). Hijzen, Mandauto, and Scarpetta ( 2017) studies the labor regulation reforms of 2012
and 2015 in Italy, which imposed high cost of dismissal of workers with open-ended contracts.
Using a nationally representative firm-level dataset and employing a regression discontinuity design,
the study finds that the legislation significantly increased the employment of temporary workers.
Second, lower labor cost may enable employers to expand employment opportunities overall.
Chaurey ( 2015) uses establishment-level data from India and shows that firms in Indian states with
more restrictive labor regulations hire more contract workers in response to unforeseen labor
demand shocks. Similar results are also found in the developed country context (Bentolila and
Bertola 1990; Bertola 1992; Hopenhayn and Rogerson 1993; Nickell and Layard 1999; Koeniger
and Prat 2007), although the takeaways across studies have been mixed (Alvarez and Veracierto
2001; Cacciatore and Fiori 2016). Aguirregabiria and Alons-Borrego ( 2014) study the impact of a
labor market reform carried out in Spain in 1984 that removed restrictions on permanent and
temporary employment. The study is based on a dynamic labor demand model of a two-tiered labor
market incorporating both fixed-term and open-ended employment with employment adjustment
costs. Using a longitudinal firm-level dataset with observations both before and after the reform, the
study shows that the reform can lead to a significant increase in total employment, achieved in part
by the substitution of open-ended employment with temporary workers.
Finally, while contract employment may increase employment opportunity by lowering the cost of
labor, there is a concern that the cost of such employment expansion may in fact be lower
productivity per contract worker. Using establishment-level data from India, Soundararajan ( 2015)
distinguishes the contemporaneous and lagged effects of utilizing contract workers. The study
extends the Olley and Pakes ( 1996) class of proxy estimators to show that contemporary
productivity effects of contract workers are positive on average, reflecting their high motivation
levels in an expectation to obtain permanent status. However, average lagged productivity effects are
negative, indicating that contract work arrangements that typically last only for a fixed term can
hinder the accumulation of firm-specific human capital, with subsequent adverse effects on
productivity. Similarly, using data from two waves of the Workplace Employment Relations Survey
of the United Kingdom, Bryson ( 2013) finds that firms that employ temporary agency workers tend
to exhibit higher value-added per worker. However, workers in such establishments exhibit lower
job satisfaction and higher job anxiety. Chadi and Hetschko ( 2016) echo these findings in the
context of Germany. In terms of productivity, Hirsch and Mueller ( 2012) examine the possibility
that temporary work negatively impacts firm-specific human capital accumulation, while it
facilitates more flexibility in hiring and firing. Interestingly, the study shows that there is an inverted
U-shaped relationship between the extent of temporary employment and firm productivity.
Country- and Regional-Level Studies on Employment
Flexibility in Developing Countries
In addition to studies dedicated to examining the impact of contract employment per se, many
related studies look at the role of employment flexibility, broadly defined, to include regulation on
contract employment, for example, on overall employment and wages. There are also studies that
include contract employment as an outcome that responded to employment protection reforms.
Select studies also cover firm-level strategies such as investment and productivity. To date, a variety
of empirical approaches have been employed, including the construction of index measures of labor
regulations; within- and cross-country variations, in particular, labor market regulations,
instrumental variables, and exogenous treatments (e.g., weather conditions, import intensity, and
minimum wage regulation and enforcement) as triggers of contract employment; and regression
discontinuity designs exploiting large shifts in labor market policies for particular worker cohorts.

India
One of the earliest works in this area is Fallon and Lucas ( 1991), which leverages within-country
variation in employment protection legislation that limited hiring flexibility in India. The study finds
a large negative impact on employment and a sizeable negative effect on output. A seminal study in
this area is Besley and Burgess ( 2004) (henceforth, BB). The study investigates the employment,
output, productivity, and investment implications of labor market regulations governing state-level
differences in employment rigidities. The study canvassed state-level amendments to the Industrial
Disputes Act of 1947 in India, and classified states as neutral, pro-employer, or pro-worker, based on
whether the amendments cumulatively are neutral and provide employers flexibility, or if they add to
the labor market rigidity. The results of the study indicated that state-level amendments aimed at
further increasing labor market rigidity lowered employment, output, productivity, and investment. 1
A number of studies use the BB measure, or build on them and echo these above findings. Foster
and Rosensweig ( 2003) use the BB labor regulation indicator and find that the negative implications
of labor market regulations on manufacturing employment apply to village-level employment as
well. Hasan et al. ( 2007) show using the BB indicator that state-level employment improves faster
in response to trade liberalization in India (using an indicator variable for post-liberalization (1991)
period and variation in tariff rates) in labor markets in pro-worker states. Ahsan and Pagès ( 2007)
provide additional nuance by distinguishing between two types of labor regulations covering
employment-protection and labor-dispute resolution. The study finds strong complementarities,
namely, that the effectiveness of employment protection is stronger where and when labor disputes
are harder to resolve.
Several studies focusing on India have ascertained the determinants of contract labor employment.
Saha, Sen, and Maiti ( 2013) present a theoretical model of contract employment and posit that firms
hire contract workers to offset the bargaining power of regular workers. In this context, the model
shows that exposure to import competition will encourage firms to replace regular workers with
contract workers. Empirical analysis at the state-industry-year level uses one-period lagged tariffs as
an instrument for one-period lagged import penetration ratio and shows that higher exposure to
imports indeed gives rise to greater use of contract laborers, and that states with pro-worker
institutions exhibit greater responses. Chaurey ( 2015) exploits the variation in labor demand shocks
proxied by exogenous rainfall shocks, as in Adhvaryu et al. ( 2013), and a modified version of the
BB indicator (Gupta et al. 2009) to show that firms in pro-worker states respond to these temporary
labor demand shocks by increasing contract labor usage. Sapkal ( 2016) finds that Indian
establishments increase contract labor hiring in response to stricter employment protection (using the
BB measure), after controlling for enforcement intensities across Indian states measured by the
average size of the total number of labor inspectors. Hsieh, Bertrand, and Tsivanidis ( 2017) model
contract employment as an endogenous response at the firm level when regular employment is
subject to firing cost. The study provides evidence in the context of India using a firm-year panel
that increased reliance on contract labor is positively correlated with firm size, employment
variability, the likelihood of product mix changes, but negatively correlated with the average
productivity of labor and the average cost of labor.
Chakraborty et al. ( 2020) examine the effect of import competition on employment in India. The
study specifically looks at Chinese imports because these are plausibly exogenous and also uses an
instrumental variable to address any further endogeneity concerns (Autor et al. 2013; Acemoglu et
al. 2016). The results indicate that Chinese import competition has a positive effect on employment
shares in formal enterprises in the manufacturing industries in India, indicating that the import-
induced competition resulted in the reallocation of employment from the informal to the formal
sector. Much of the observed increase in the formal sector employment was dominated by contract
labor, indicating that contract labor enabled the smooth reallocation that may have otherwise been
harder due to labor market imperfections such as costly employment protection laws and high trade
union power. In this context, consistent with the literature, the study also finds that the increase in
formalization and contract-share is differently higher in pro-workers and highly unionized states.
Another study in the Indian context looks at the effects of banning contract labor (Chaurey et al.
2020). The study exploits a 2003 ban on the use of contract labor in the core activities of
manufacturing firms in the India state of Andhra Pradesh. Difference-in-difference estimates indicate
that, following the ban, firms substituted contract labor in favor of regularly employed workers in
core activities. Accompanying these changes was a significant increase in the size of the informal
sector.

Taiwan, South Korea, and China

The East Asian experience with contract employment regulation is diverse, where some countries
explicitly prohibit the use of contract labor, while others, plausibly to encourage export
competitiveness in the age of globalization, assume a more permissive stance. Still, others are in the
process of revising their labor laws to include provisions that restrict contract employment.
A number of studies examined the role of contract employment at both the individual level and the
firm level, in addition to enforcement considerations. Using data from the 2005 Taiwan Social
Change Survey, Ko and Yeh ( 2013) find that around 17% of all workers surveyed make up the
various categories of flexible workers. Interestingly, the study finds that a higher intensity of such
flexible employment arrangements is associated with lower job satisfaction among regular workers,
although causality is not ascribed to this relationship.
Baek and Park ( 2018) examine the labor market implications of the Protection of Temporary
Workers Act of 2007 in South Korea. The legislation prohibits the use of temporary contracts for
select tasks for more than 2 years. The study exploits pre-reform variation in temporary employment
at the establishment level and applies a difference-in-difference estimator to ascertain the effects of
the legislation. The study confirms a small but significant negative impact on total employment.
Like the Indian case, the study also reveals a substitution effect, where firms decrease employment
of protected temporary workers, but increase the employment of unprotected temporary workers.
This result is particularly prominent in unionized establishments. Furthermore, the impact of the
legislation on establishment-level profit is negligible, as affected establishments are driven to adopt
more capital-intensive means of production.
In China, the 2008 Labor Contract Law spells out workers’ rights and made it mandatory for
employers to provide written contracts. The law covers a broad set of issues, but in particular, its
relationship with temporary employment lies in the provision that there is a maximum duration for
employees hired on a probationary status. Furthermore, the law also stipulates 10 years as the
maximum successive cumulative duration of fixed-term contracts. Employers must provide open-
ended contracts with associated benefits to fixed-term employees with more than 10 years of job
tenure.
Freeman and Li ( 2015) use a cross-sectional survey of migrants in 2006, 2009, and 2009, and a
“before-after design” to show that the Labor Contract Law indeed reduced the violations of workers’
rights, including those concerning wage arrears. Gallagher et al. ( 2014) highlight the importance of
state-enforcement and workers’ education level on the compliance with the law. The study concludes
that the law’s unemployment and real wage consequences were limited because compliance was
poor. Notably, Akee, Zhao, and Zhao ( 2019) demonstrate an unintended consequence of the Labor
Contract Law. The study employs a regression discontinuity design based on the 10-year
employment tenure cutoff and uses data from the 2008 China General Social Survey. The results
provide strong evidence that the Labor Contract Law gave rise to the dismissal of existing formal
contract employees who have been employed for more than 10 years, rather than yielding them
permanent status as per the law. Other studies have also focused on the impact of the law on labor
costs and employment (Chen and Funke 2009) and on the re-employment rates of long-term
unemployed workers and job match quality (You and Wang 2018), using simulations based on a
theoretical models, and on cash holdings using a difference-in-difference framework (e.g., Cui et al.
2017).

Latin America and Africa

Contract employment through employment intermediaries has become increasingly widespread in
many Latin American countries (Maurizio 2016). Issues such as wage penalty and low job mobility
are also relevant for contract workers in Latin America. In particular, Jaramillo ( 2013) studies the
case of Peru, a labor market that has experienced rapid growth in terms of employment and labor
earnings. In particular, the study finds that amidst recent growth in labor market performance, the
share of fixed-term employed workers has in fact increased. The study confirms a wage penalty
associated with contract employment and argues in support of further research that allows for a
better understanding of the unobservable features of workers and firms that in turn determine
selection into fixed-term contracts.
Other studies provide useful comparisons between the nature of an open-ended job and contract
employment in Latin America. Carpio et al. ( 2011) finds that a temporary status is associated with a
lower likelihood of receiving employer-paid training in Chile, although strong causal links are not
established in these associations. The study arrives at this finding based on data on a panel of
workers for 4 years between 2002 and 2009 from Chile’s Social Protection Survey. The study also
shows that only a small fraction of temporary employment contracts translate to open-ended
employment opportunities.
Cazes and de Laiglesia ( 2015) assess the extent to which temporary jobs (including fixed-term
contracts and temporary agency employment) are a source of wage segmentation in the labor market.
The study includes OECD countries and some Latin American countries and finds a positive
correlation between a higher prevalence of fixed-term contracts and wage inequality. The study also
points out that in Chile a high proportion of temporarily employed workers are in triangular
employment relationships, featuring temporary agency contractors as the direct employers of
contract workers.
To the best of our knowledge, there is almost no analytical evidence examining fixed-term contracts
in Africa. An exception is Bertrand and Crépon ( 2020) that present somewhat contradictory results
on the effects of labor laws on fixed-term employment. The study randomizes the provision of
information about labor regulation through newsletters and access to a specialized website. Results
indicate that employment was higher in treated firms and that employment compositions in terms of
permanent versus fixed-term versus causal employment did not get affected as the result of the
treatment. The authors conclude that the intervention limited the perception of labor regulations
being detrimental and hence increased optimal employment level.

Cross-Country Studies
What lessons can be drawn from cross-country studies? Two observations should preface any
examination into the findings of studies to date. First, policy effectiveness is predicated both on the
appropriateness of the chosen policy and adequate enforcement (e.g., Almeida and Ronconi 2016). It
follows that ambiguity in interpretation may naturally follow any null response unless care is taken
to account for the strength in legal and enforcement institutions. Second, policy effectiveness is
dependent on the enforcement of not just one policy but more often than not the right mix of policies
(e.g., Betcherman 2015) as labor standard evasion can easily turn into avoidance unless loopholes
are closed, and importantly, the ability to substitute regular worker using contract workers is a
prominent avoidance device. Thus, while cross-country empirical studies typically use broad indices
of labor market rigidity indicators, a key issue is the need to be mindful that results are index-
dependent.
With these caveats in mind, cross-country studies have shown that employment protection can
demonstrate interesting and varied impacts on developed and developing economies, depending on
how the indicators are designed. For example, Ciminelli and Furceri ( 2017) construct a new
database of employment termination legislations, giving particular attention to potential within-
country heterogeneity depending on firm size, firm age, and workers’ skill levels. They find that
employment protection legislation is associated with higher levels of economic activities,
particularly among advanced economies. The higher levels of economic activity would seem to be at
odds with within-country evidence, for example, Besley and Burgess ( 2004) who find that output
and profits decrease with higher employment protection legislation. Such legislations are also
negatively correlated with labor force participation and employment rates, but the relationship does
not hold for developing countries. Campos and Nugent ( 2012) extend the seminal Botero et al. (
2004) study by constructing a composite index of employment protection legislation related to the
ease of employment termination, the feasibility of alternative employment contracts, and the cost of
overtime work, covering over 150 countries starting in the 1960s. The study finds that legal origin is
a major determinant of cross-country differences in employment protection legislations. Contrary to
Ciminelli and Furceri ( 2017), this study shows that employment rigidity does not appear to impact
economic growth significantly. However, employment rigidity does appear to have an important
bearing on lowering income inequality.
Cross-country studies that explicitly demonstrate how firms avoid employment protection
legislations by hiring temporary contract workers also exist, but in nuanced ways. For example,
using survey data from over 10,000 firms around the world, Pierre and Scarpetta ( 2013) show that
tight employment protection laws encourage the use of temporary contract workers and investment
in worker training. Aleksynska and Berg ( 2016) assess the determinants of the use of temporary
contract by firms in 135 developing countries. The study uses data from the World Bank Enterprise
Survey, which collects data from formal companies with five or more employees, operating in
manufacturing and services sectors. The study finds that the prospect for reductions in labor cost is
just one motivation for hiring contract workers. Rather, the need for external flexibility is one of the
most important reasons to use contract workers.

Alternative Considerations
Arguments in favor of contract employment often stress the importance of hiring/firing flexibility. In
these arguments, there is often an implicit presumption that unregulated decisions by employers and
workers can replicate efficient outcomes, as may be the case where all markets are complete,
commitments are credible, and enforcement of any labor market regulation fully guaranteed.
Of course, these prerequisites are often a far cry from circumstances facing firms, workers, and
policy makers in developing countries. In what follows, three sets of deviations from complete
contracts and frictionless markets will be examined, and their implications on the desirability of
contract employment will be discussed: (i) risky employment and the need for risk-sharing implicit
contracts, (ii) task-based employment and allocation of tasks with efficiency wage considerations,
and (iii) middleman subcontractors and the ability to incentivize effective levels of worker morale.

Employment Risks and Incomplete Contracts

Market demand for a given worker in open-ended employment at guaranteed wages can be uncertain
for various reasons. Weather fluctuations, product demand shocks, labor supply shocks, and labor
saving technological change are all possibilities. In agriculture, a two-tiered labor market is
commonplace, where open-ended employment at unchanging and typically lower wages apply to so-
called permanent workers, while peak/harvest period needs then dictate how many seasonal contract
workers will be additionally employed along with the corresponding market-clearing wage (Bardhan
1979; Eswaran and Kotwal 1985; Basu 2002). Azariadis ( 1975) coined the term implicit contract to
mean risk smoothing employment contracts that lower expected labor costs when workers are risk-
averse. The feasibility of such contracts depends on the credibility of the promise not to fire workers
in times of low labor demand. Absent credible enforcement of such promises, contracts’ terms are
inefficient (Azariadis 1975, Baily 1974), workers underinvest in firm-specific human capital (Singh
et al. 2019), and unregulated firms potentially hire too many contract workers.
In this context, relaxing regulations related to the hiring of contract workers may in fact perpetuate
the employers’ credibility problem. Indeed, Blanchard and Tirole ( 2010) find that mandatory
severance pay may improve the risk-sharing properties’ implicit contracts. Likewise, Basu, Chau,
and Kanbur ( 2016) show that a well-enforced minimum wage enhances employers’ ability to
commitment to maintain worker discipline. Wholesale recommendation for relaxing employment
protection may thus run the risk of depriving employers of a credible commitment to provide a high
wage job with job security.

Task-Based Employment and Efficient Task Allocation

As is evident from Table 1, whether the employment of contract workers is deemed appropriate is
often dependent on whether these workers are employed in “permanent tasks.” The employment of
open-ended and contract workers can thus impact the allocation of workers by contract types to
various tasks in the production process. This simple observation would suggest multiple nuanced
views on purpose of contract employment. First, contract employment facilitates the subcontracting
of tasks through outsourcing, for example, when tasks are accomplished by lower-wage workers
hired by another firm. Contract employment, by contrast, may also entail the in-contracting of tasks
where the firms hire temporary workers at a lower wage to work in the same factory alongside
workers with open-ended contracts.
Basu, Chau, and Soundararajan ( 2020) follow this line of argument in a setting where the efficiency
wage is paid to workers with open-ended contracts, while contract workers receive an acceptable
wage. This duality is set in a task-based model of the labor market, where complicated tasks are
accomplished by open-ended contracts at the efficiency wage, while contract workers complete the
rest. In so doing, the study endogenizes the wage differential between the two types of workers,
which in turn guides the allocation of tasks between workers and the share of open-ended to contract
employed workers in the firm. The study shows that because of the need to pay an efficiency wage
to workers with open-ended contracts, there is, in equilibrium, an overemployment of contract
workers. Regulations that further discourage open-ended contracts will exacerbate this task
allocation distortion. The task-based view of the labor market introduces a new perspective to the
contract employment debate and demonstrates that rising total employment alone does not guarantee
to a move closer to first best; rather, the combination of task allocation mix and the overall quantity
of employment together determines market-level efficiencies.

Worker Morale with Subcontracting

A notable gap in the contract employment literature is that there is as yet an incomplete
understanding of the difference that employment intermediaries make to the employment and
earnings of contract workers. Abraham and Taylor ( 1996) is one of the earliest studies on the
reasons why firms may favor hiring contract workers through employment intermediaries; these
include wage cost savings, uncertain demand, and the need for specialized skills. Houseman ( 2001)
echoes these results and adds the need to screen workers for regular positions as an additional factor.
Weil ( 2014) coins the term “fissured” labor market to describe an “increasingly subcontracted labor
market.” Contractors are positioned to bid against one another to win the contract from a client firm,
and the lowest bidder wins. In this way, contract workers’ wages do not correctly reflect the
marginal product of each worker to the client firm.
In Basu, Chau, and Soundararajan ( 2019), a contract theoretic model of the labor market is proposed
in which subcontractors are hired to provide the client firms with workers for a designated set of
jobs. The study introduces endogenous morale consequences of contract employment when workers’
wage expectation is based on a demand for fair wage (Akerlof and Yellen 1990). The study then
shows that (i) an equilibrium in which contract workers are paid an unfair wage with inefficient
morale consequences can be found, and for this reason (ii) higher total employment when contract
employment is fully unregulated does not guarantee a higher level of overall efficiency. These
results once again question the effectiveness of using total employment as a proxy for market
efficiency, when worker morale is endogenously determined based on wage fairness.

Summary
The prevalence of contract employment has grown worldwide. This chapter reviews the evidence on
the scope of contract employment in developing countries. Contract employment has been shown to
impact worker-level outcomes, including inferior wages and benefits, heightened job insecurity, and
an overall decline in job satisfaction. Meanwhile, studies have shown that the overall employment
implications of contract employment ultimately depend on the balance between the need to lower-
wage cost and potential adverse productivity considerations.
Interestingly, we find that globally there is very little consensus on whether contract employment
should be fully legalized. This chapter explores the legal landscape related to the adoption of
international labor standard conventions and a country’s local rules and regulations. It is shown that
a common law tradition appears to be associated with rules and regulations that favor employment
flexibility and temporary employment. For countries inheriting legal origins different from the
common law tradition, adopted legislation run the gamut from cases where temporary employment
is not permitted for permanent tasks to others where contract employment can, in fact, be
permanently temporary with no legal consequences for the firm.
While earlier studies based on labor market level performance indicators have often found contract
employment as an offshoot of restrictive employment protection legislations, recent analyses have
demonstrated useful nuances. For example, studies based on firm-level datasets have demonstrated
the role of exogenous shocks (e.g., using rainfall, and import exposure) in encouraging producers to
adopt contract employment as the mode of recruitment. Studies based on labor force surveys,
meanwhile, have revealed worker-level implications of contract employment, including future
permanent employment, and demographic outcomes such as marriage and fertility decisions.
Cross-country studies tended to yield mixed results in terms of employment, growth, and income
inequality consequence of employment protection legislations, although it should be noted that these
studies are often based on index measures of labor market rigidity or employment protection
legislations. As different studies tend to employ different indices, results across studies are not
strictly comparable. In addition, employment legislation may themselves be endogenous responses
to labor market characteristics that differ from country to country. Further, the institutional details on
how contract employment is defined itself may differ across countries. These limitations naturally
suggest that empirical findings from cross-country studies should be understood and interpreted with
care.
Finally, this chapter describes three new avenues for research. In each case, the motivation is to
ascertain the drivers of contract employment other than pure wage cost minimization concerns.
Respectively, these new research directions take into account contract employment as (i) an implicit
contract to smooth risks, (ii) task-based allocation of workers depending on the need for employee
discipline, and (iii) the role of the middlemen in a fissured labor market with variable worker moral
depending on whether wages are deemed fair. In each case, it is shown that total employment is but
one of multiple indicators of labor market efficiency. Future empirical studies should consider
addressing the risk smoothing role of contract employment among the regular and contract employed
workers, productivity difference between regular and contract workers, and the role of staffing firms
in facilitating the employment and wage setting of contract work. In addition, since minimum wages
are typically poorly enforced in developing countries, future studies should also account for the
possibility that the wage gap between regular and contract workers is endogenously determined by
the same forces that affect contract employment. General equilibrium models that endogenize the
wage of both regular and contract workers are better suited to answer questions concerning the
determinants of contract and regular wages. Finally, empirical work in this area has been primarily
regression-based, using quasi-experimental policy shocks, and/or within-country/within-firm
variations in exposure to shocks. Experimental approaches to examine other constraints (e.g.,
informational constraint in Bertrand and Crépon 2020) that impact firm-level responses to labor
regulation present promising avenues for future research.

Cross-References
. Employment Insurance and Social Protection
. Fair and Unfair Income Inequality
. Inequality of Opportunities in the Labor
. Inequality of Opportunity
. Labor Negotiations, Conflicts, and Arbitration
. Wage Policies, Incentive Schemes, and Motivation
. Wealth Inequalities

Acknowledgments
Responsible Section Editor: M Niaz Asadullah
The article has benefitted from valuable comments of the editor. There is no conflict of interest. All
remaining errors are our own.

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Footnotes
1
There are critical reviews of the construction of the BB labor market regulation indicator.
Scholars, for example, have questioned whether the amendments made to the IDA have
increased or decreased flexibility in firing and whether the discreet codification of long texts
of amendment is reasonable (Bhattacharjea 2006) or whether these regulations have even
been enforced at all (Nagaraj 2002).