Does Labor Composition Impact the Transmission of Monetary Policy to Output?

We ask whether the presence of contract workers influences the sensitivity of firms’ output to monetary policy changes due to a relatively lower rigidity of contract workers’ wages. We use a judgment of the Supreme Court of India that facilitated the hiring of contract workers as a setting that exogenously increased their presence, especially in states having stringent labor laws. Differences-in-differences and triple difference tests show that the sensitivity of output to monetary policy changes moderates due to the presence of contract workers. The relative flexibility of contract workers’ wages and not the relative ease of hiring/firing is the mechanism.