1. Contractors save employees their jobs. Any time there is a downturn in the economy or a company's fortunes, they cut back on IT staff - and the contractors almost always go first. Currently 35-50% of them are unemployed.
2. If full time workers ever need any extra money, then the opportunity is always there for them. If contracting disappeared then so would that opportunity.
3. Cross Pollination - Contractors bring new ideas and techniques from other sites. The also upgrade the skills of the permanent employees.
4. Contractors are generally happy just to do the work and not get involved in office politics, which makes for an easier office atmosphere.
5. Having contractors on the site gives full time employees a much better and quicker chance of promotion. Many IT departments have their full time staff at junior and senior management level, and have contractors or permies with less than two years experience doing the development work.
6. Contractors can pass on lots of useful knowledge and experience of the jobs market. In fact permanent employees often take their first step on the road to becoming a contractor by approaching one of the contractors on the site.
7. Being able to 'boss around' guys much older than yourself is good for your morale and self-esteem. It looks good also, when your wife, friends, or senior management come to the office. It looks as though you are an up-and-comer, who is overtaking people on the way up. The visitors won't necessarily know they are contractors.