Import Competition, Formalization, and the Role of Contract Labor.

The article investigates the impact of increased Chinese import competition on the formalization of manufacturing employment and aggregate productivity in India between 2000 and 2006. Using industry- and firm-level data combined with an instrumental variable approach exploiting exogenous variation from Chinese imports to Latin American countries, the study finds that higher Chinese import competition raised the share of formal-sector manufacturing employment by 3.7 percentage points, primarily through an increase in contract workers hired by high-productivity formal firms, alongside a decline in informal-sector employment. This labor reallocation within industries led to an estimated aggregate labor productivity gain of approximately 2.87 percent, driven by resource shifts toward more productive firms, as confirmed by an Olley–Pakes decomposition. The findings highlight the role of contract labor in facilitating formalization despite stringent Indian labor regulations and suggest that formal-sector jobs, including contract positions, offer better job quality and benefits compared to informal-sector employment.