Practical Definitions: An Employee is part of the liability on a company's balance-sheet, its a cost to be pruned when the going gets tough. IN any large company worth its name he is just a number on the wrong side of the Balance Sheet, how good/loyal he is almost completely irrelevant.
A Contractor is a resource and his cost comes from the Project's budget. A manager's position is strengthened by managing ever larger(read costlier) projects , it is in the manager's interest to have more resources(read contractors). End Definitions.
Contractors by their very nature have no say in the corporate political power game thereby not threatening a manager's position. If something doesn't work out and its time for a scape-goat , contractors can very easily be dismissed , letting go of an employee is a much more onerous task.Given a choice a Manager will almost always opt for a contractor and to top it all of Contractors earn more cash.
Why would one want to be an employee in any large corporate entity ?