Do Temporary Workers Face Higher Wage Markdowns? Evidence from India's Automotive Sector

TL;DR

This paper investigates wage differences between temporary and permanent automotive workers in India, finding that productivity differences, not market power, explain wage premiums, with implications for inequality and welfare policies.

Contribution

It develops a novel estimator of labor market schedules incorporating worker types and bargaining, revealing productivity as the key factor behind wage premiums.

Findings

Wage premium for permanent workers is driven by higher productivity.

Welfare gains from transfer policies are offset by increased wage inequality.

Market power does not significantly contribute to wage differentials.

Abstract

Contract workers constitute half of India's automotive employment but earn substantially less than permanent workers. Using ASI data (2002-2019), I develop an estimator of labor supply and demand schedules to explain this wage premium. The model features worker-type-specific discrete choice labor supply, nested CES production, Nash-Bertrand competition for contract workers, and plant-union bargaining for permanent workers. I find the premium stems entirely from higher productivity rather than differential monopsony power. While a lump-sum transfer offsetting wage markdowns would increase welfare by 14% for permanent and 12% for contract workers, it would simultaneously increase the premium by 14%, exacerbating inequality.