Subcontracting and the size and composition of the informal sector: evidence from Indian manufacturing

Subcontracting and the size and composition of the informal sector: evidence from Indian manufacturing

(joint work with Ana Moreno-Monroy and Abdul Erumban, both at the University of Groningen)

Abstract:

This study analyzes the relationship between formal sector subcontracting and the evolution of informal sector employment using nationally representative survey data of Indian manufacturing enterprises for the period 1995-2006. In these years of fast economic growth, subcontracting by formal enterprises gained importance, while the informal sector continued to account for 90 per cent of total manufacturing employment. In order to contrast between a ‘modernization’ and a ‘stagnation’ view on formal-informal production linkages, we test whether subcontracting increases employment in modern versus more traditional segments of the informal sector. The results show that formal sector subcontracting is positively related to employment in only the most modern informal activities, supporting the view that subcontracting is related to informal sector modernization. We find no support for the claim that the continued employment growth in very traditional informal manufacturing segments is related to increased outsourcing by formal manufacturing enterprises.

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Roy Huijsmans