Note that I said "in the same position"—it's also common to use cheap contract employees for "disposable" jobs like administrative assistants and more expensive permanent employees for management-track jobs, which may be what you're thinking about.

If someone has a choice between a permanent job and a contract job doing the same thing, all other factors being equal, they are going to take the permanent job for the added security—so the contract job has to pay more.

Hopefully this distinction will go away soon.