Contract employment is a predominant form of employment in developing countries.Conventional argument goes that wage polarization between regular and contract workers incentivizes the contracting out of select tasks. But what drives the wage polarization that persists despite the popularity of contract work? This paper formulates a unied model wherein the general
equilibrium implications of heterogeneous tasks assignment under imperfect monitoring, polarized wages determined by eciency considerations, and the coexistence of regular-, contract- and involuntary un-employment can be understood together. We classify the forces that drive co-movements of contract and regular wages and discuss their implications on the relative supply of high wage (regular) and low wage (contract) jobs. Using a comprehensive data set with detail records on contract
and regular work at the establishment level in India, we nd that contract wages do catch up, but do so inelastically in response to increases in the regular wage. These observation allow us to draw very nuanced conclusions concerning the mechanics of high wage job generation in the labor market.