This paper predicts different plausible conditions which might have arisen out of a complex relationship of wage differentials between regular and contract workers in helping predict the employer’s ability to hire more labor on contractual terms especially if the labor cost was fixed in a fairly unionized sector such as manufacturing in India postliberalization. It examines the roles played by wage differentials in maintaining demand for regular workers to a change in the wage rate elastic while other factors of production were easily substituted and in maintaining demand for substitution of regular labor while other inputs to the production inelastic. It offers direction towards finding how improved labor flexibility made one of the two categories of workers prosper at the cost of the other’s hardships during post-liberalization.