Child Labor: At the Micro and Macro LevelBy: Derek Applegate

Professor Kitissou

Introduction:

Child labor is a subject that is not often talked out in news as it is kept from the public

eye. Child labor is seen to arise out of poverty in impoverished countries where low wages and

slow, if any, economic growth occurs. The model that inspired this paper is based off the idea

that children will be added to the labor at such a point where wages fall that is not sustainable for

only an adults income. The model also suggests if wages rise above a certain threshold children

will no longer be needed in the workforce because the wages that the adults will bring in will be

better served at sending a child to school or be more sustainable to the household’s economic

growth. This model leaves out many of the determinants for why wages dip below that threshold

or rise above that threshold. The point of this paper is explain, in part, the determinants of child

labor that force adults to make children work with special regard given to wages. The paper also

looks at how wage rigidities and inflation rates play into life expectancy and economic growth

which is then tied back to child labor. Each of these ideas plays a major role in shaping child

labor. If there is one policy suggest that this paper implores to “solve” the child labor problem it

would be to insure steady growth rates that are coupled with some inflation so that life

expectancy and wage rigidities are done at the pareto optimal level for both child workers and for

adults.

Article 1:

Given that the topic is concerning generations and pay and how those can affect

economies well-being it makes sense to start with fertility and wage rates since fertility is what

determines the size of the next generation. Jie Zhang and Junsen Zhang have explored this topic

by reconciling two differing conclusions about the relationship between fertility and wage rates

in steady state equilibrium. According to Zhang and Zhang, Malthus predicts a positive

relationship between fertility and wage rates. Zhang and Zhang also note that Barro and Becker

conclude a negative relationship between fertility and wage rates. Zhang and Zhang observe that

the models that where wage and interest rates are inversely associated via a differing contingency

with the capital to labor ratio (Zhang, and Zhang 224-234). The principle behind this paper is

that there is fertility of changes in wage rates that offset each other. The idea is that since higher

wages cause income and substitution effects which have relationships. The important effect here

is the substitution effect due to there being higher opportunity costs associated with raising a

child. That said, the net effect, of the substitution effect and the income effect, is dependent on

the strength of the overall magnitude of these two effects (Zhang, and Zhang 224-234) . In order

to measure this Zhang and Zhang have decided to measure bequests at the positive and zero

level. For reference, bequests are the transfers of wealth between generations after a person dies.

Zhang and Zhang find that when bequests are positive that fertility and wage rates are negatively

related while when bequests are zero fertility and wage rates are positively related.

There still needs to be more historical research on this topic to determine how it bequests

change with time, however, it can be divined that this plays a role in wage rates and generations.

When bequests are positive, wage and fertility rates are inversely related. This means that

fertility rates could be high whilst wage rates are low. This implies that there could be large

number of children in the work force if wages are low enough. Conversely, if wage rates were

high and fertility rates were low this could mean that children are not a part of the work force

since adults are being paid well enough to keep children working. Zhang and Zhang’s analysis of

bequests can be shown in both first and third world countries as a way to measure the probability

of child workers depending on how the relationship is done.

Article 2:

Now that there is an understanding on the relationship between wages, fertility, bequests

and child workers there can be a discussion about first world countries. More importantly, first

world countries and wage determination in overlapping generations in unions. Frederik Huizinga

argues that whenever a firm bargains over packages of wage-employment with a whole

workforce, or union, the contracts overwhelmingly favor older workers. The mentality of the

union is that older workers have no incentive to increase the conditions of younger workers and

young workers care about older workers since they will stay at the firm for long enough for those

policies to affect them. The mentality of the firms suggests that productivity should correlate

with experience. However, Huzinga references Medoff and Abraham whom suggest that there is

a zero (and in some cases negative) correlation with experience and productivity (Huizinga 81-

98). Huzinga points out that most studies omit that workforces are usually heterogeneous cohorts

with overlapping generations. (Huizinga 81-98) The problem with those studies, argues

Huzinga, is that they leave out many intergenerational forces that determine wage employment

packages. The key conclusion of Huzinga’s study is that firms will negotiate with many different

generations at the same time the older generations are more likely to receive favorable treatment.

This is usually taken with the context of a union setting but it could occur in a non-unionized

setting if the labor market is internally strong.

On the surface the discussion on union wages trending towards older workers may have

nothing to do wage rates and children in the workforce but one would need to dig a bit deeper to

see the connection. The connection is that in a unionized setting with workers where there is

higher pay and benefits for older workers the workforce would naturally trend towards having

adults. The logic is that since firms make the faulty assumption that older workers are more

productive and workers naturally want to be at a firm to see the gains for older workers there will

be an increase in pay for those workers. What this means for the wage and child workforce

model is that unions and strong internal labor markets naturally trend towards not having

children in the workforce since the wages will be trending high for adults given firms natural

predisposition towards older workers.

Economics of child labor (Articles 4, 5 and 6):

Child labor analysis is the key to understanding how different generations affect the wage

rate and how the use of child labor comes about.The one idea that is accepted across all those

that study child labor is that it decreases the welfare of the country that is practicing child labor.

Kaushik Basu and Pham Hoang Van provide the ground work for analyzing child labor by

suggesting that child labor is an outgrowth of survival of the household rather than maliciousness

or selfishness on the part of the parent. Basu and Van explore that many of the misconceptions

about child labor essentially originate in how the parent is viewed.. Basu and Van point that child

labor has been likened to child abuse but offer that that particular explanation does not hold up to

deeper scrutiny. Basu and Van point out that parents are usually characterized in models as being

self-interested and only care about their well-being but that parent’s care about a child’s well-

being forms a more cohesive model. Basu and Van suggest that child labor is a mass

phenomenon in many less developed countries and that this represents a problem of the poverty

in these countries rather than a fault of the parents. The key point that Van Basu make is that

parents were unhappy about sending kids to work in the 18th and 19th centuries but the current

social system at that time left them with no choice (Basu, and Van 412-427). The same can be

said of parents who have child laborers currently. Given this suggestion Basu and Van

hypothesize that parents would not send their child to work had they have been paid high enough

and assume that a ban is put into effect. Basu and Van then assume that adult and child labor is

seen as substitutes which would lead to wages rising because there would be a shortage for labor

and the adults would now fill that void (Basu, and Van 412-427) . In response wages would rise

which would lead to adults sending children to school instead. This would ultimately defeat the

purpose of the ban on child labor. What is the crux of what Basu and Van are suggesting is that

labor markets have multiple equilibria. These multiple equiilibria take the form of wages being

low and child labor is evident and the other that suggests that wages are high and child labor is

absent. It is worth noting that this is in line with what Zhang and Zhang concluded on fertility,

wages and child labor.

What Basu and Van are going after in contrast to Zhang and Zhang is the need for bans

on child labor can be based upon that labor market inherent tendency to display multiple

equilibria. Basu and Van find that bans in multiple equilibria child-labor markets can be socially

desirable intervention to solve child-labor. In contrast, child labor bans in one equilibrium labor

markets, and especially in very poor countries, tend to lead to worsening labor conditions. This is

also true for partial bans on child labor as well. Basu and Zan suggest that the best policy is to

focus on improving working conditions and breadth of adult labor which would naturally resolve

the child labor issue.

This plays into Huzinga’s analysis because if there is a strong internal labor market in

these countries there would be wages that would trend towards older workers and would lead to

an increase in breadth of benefits for adults. The quandary that would need to be answered is

how to induce a strong labor market into a poor country.

Piya Ranjan also dissects child labor as well and, in doing so, borrows much from Basu

and Van. For the sake of brevity, I will only go over what Ranjan disagrees with Basu and Van

over and maintain the assumption that Ranjan agrees with everything else that Basu and Van

argue. Ranjan points out that Basu and Van do not discuss the trade-off of education and child

labor. Ranjan finds that educational attainment is a substitute for child labor. Ranjan asks why

parents send their children to work rather than to school where there are higher returns to be

made on education (Ranjan 99-105) . Ranjan postulates that the reason why children are put into

the workforce is that parents lack the ability to substitute foregone returns on their children. This

lack of ability is due to a lack of a market for loans against future earnings. Ranjan suggests that

if households could borrow adequately that children would be sent to school since returns on

education would be high (Ranjan 99-105) . This lack of a borrowing market creates a situation

where households can’t risk losing the foregone returns on a child if those returns could pay for

utility costs of households. The role of the government in Ranjan’s case is to improve welfare of

households. Ranjan argues that banning child labor reduces the welfare of households. Given her

prior points, I can posit that she is thinking of child-labor markets with one equilibrium. Ranjan

suggests that policy to combat child labor should come in the form should relax borrowing limits

through raising parental income or providing income support for child schooling. Ranjan also

points out that a policy of redistributing household income can reduce prevalence of child labor

while maintaining welfare of poor households (Ranjan 99-105). Ranjan finds that a policy to ban

imports on products that were from developing countries that use child labor is unlikely to be

effective since it decreases the welfare of households.

Ranjan continues a common theme that has been present in both the prior arguments

about what causes child labor to occur as well in the implications. This common theme is that it

places agency into adults who have children as the main reason for children being included in the

workforce. Given this new theme it is worth considering if child labor is more efficient that adult

labor. Jean-Marie Baland and James A. Robinson ask this question while using the framework

that Basu and Van used to determine child labor.

Baland and Robinson argue that child labor is caused by choices of the parent to

accumulate capital or put the child to work. Baland and Robinson suggest that even if the parent

is altruistic and child labor is seen as socially inefficient; child labor will still arise in a model in

equilibrium due to parents not internalizing the negative effects of child labor. Much like Zhang

and Zhang, Baland and Robinson are concerned with bequests. Balan and Robinson are

concerned with bequests in relation to efficiency. This is to say that if a family is so poor that

the parent lacks the monetary power to pass off earnings on to the child so that he or she does not

need to work. Baland and Robinson argue that when bequests are positive parents completely

internalize the harmful effects of child labor and calculate future of earnings of child to

determine that parental wages outweigh children working (Baland, and Robinson 663-679). This

also means that the parent is making enough that the parent can compensate for the child

working. However, Baland and Robinson argue that even if bequests are part of the system that

child labor can still arise (Baland, and Robinson 663-679) . Baland and Robinson find that

capital markets may be less than efficient which may prevent bequests from being passed onto

children. Baland and Robinson conjecture that a case may be made for reverse altruism where

the child transfers money to adults can occur but only in prefect capital markets. Unfortunately,

reverse altruism does not in any way get rid of the inefficiencies of child labor when child labor

arises out of imperfect labor markets. Differing from Zhang and Zhang, Baland and Robinson

find that a small ban on child labor may cause a slight pareto improvement despite the parents

not receiving any compensation (Baland, and Robinson 663-679).

This where I must take some time to disagree with much of the premise of this paper

especially in the way it conceives the parent. Baland and Robinson argue that parents do not

fully internalize the effects of child labor. I disagree with this sentiment because even though

parents may be poor and not very well educated a parent can understand that the working

conditions that a child is working in. This makes sense in that parents may often be working at

the same place but will be doing different jobs. Granted these jobs may not always be dangerous

and parents can rarely see how inefficient child labor is in comparison to their own but to say

that parents do not understand or internalize conditions of work is a wrong assumption. Baland

and Robinson also argue that reverse altruism occurs where children give to parents. I disagree

and find that children would be doing that anyways considering that parents are not making

enough to sustain household income on their own. I suggest that this reverse altruism is an

integral part of the child labor issue in that it is not an assumption to be made but rather a reality

that is inherent in within each household. I do agree that capital markets can definitely play a role

in a system where bequests are positive but the market is still skewed at hurting lower income

brackets. Baland and Robinson finds that a small ban can be useful pareto improvement and

increasing efficiency; I still find that I disagree with the methodology because bans can be

become obsolete very easily. Going back to Basu and Van, it makes more sense to improve

conditions of parents and adults than to impose a ban even if it induces improvement. The reason

is that adults are left less well-off and there is no compensation for them. Add in that households

now lose a part of their income due to the ban and it is easy to see that this ban can make

households worse off rather than better off especially if capital and labor markets are skewed out

of equilibrium.

Article 7:

Now that we have understood the major economic theory on child labor we can begin to take

first world models of how wages remain rigid and what effect that has on first world countries.

This can then be used to extrapolate what would occur in countries where child labor is

practiced. Lorenz Goette, Uwe Sunde, and Thomas Bauer approach wage rigidity using three

different countries: Germany, Great Britain and Italy. The main underlying assumption of their

article is that wage rigidity is based upon the idea that wages cannot be adjusted downwards

(Goette, Sunde, and Bauer 499-507) . Goette, Sunde and Bauer find that there is no empirical

evidence that shows the causes and consequences of wage rigidity. For the purposes of the paper

I will only be exploring the effect wage rigidity has on labor markets since it is the most

pertinent. This is not to say that the macroeconomic effects don’t matter but that they don’t fit

into the purpose of this paper. In all three countries in their analysis, Goette and company found

union wage growth was able to explain real wage rigidities. Unfortunately, Goette and company

were unable to ascertain whether these finds were based upon bargaining power or based upon

efficiency wages paid. In all countries, Goette and company found that real wage rigidity became

less important over time. Interestingly, the lower the inflation rate the more likely that real wage

rigidity is going to be ignored (Goette, Sunde, and Bauer 499-507) . According to Goette etc. this

implies that monetary policy plays an important role in influencing labor market outcomes. In all

three countries, these wage rigidities are associated with bad labor outcomes. In all cases, these

labor outcomes take the form of high labor turnover since firms would rather fire workers rather

cut wages.

What does wage rigidity matter to child labor and parents? On the surface it may not

mean much but consider that if a country imposed a wage restriction on parents so as to spur

parents to work at higher wages. This allows the country to get rid of child labor without a ban

but also to get parents to work. In essence, this would lead to high labor turnover if the model

that Goetteetc can be placed into a child labor context. This would obviously be heavily

dependent upon the monetary policy that country would take but it would not necessarily leave

parents in a better position than they were pre-wage rigidity.

Article 8:

The next point of concern is over life expectancy in relation to money and economic

growth. Akira Yakita uses an overlapping generational two period model to determine the effects

of money supply, inflation and capital accumulation on life expectancy. The main drive of

Yakita’s paper is that inflation rate plays a large part in fertility rate as well as capital

accumulation. Yakita shows that if the money supply is at a high enough level so that it creates a

positive inflation rate will lead to an increase in life expectancy. This increase in life expectancy

naturally leads to an increase in total savings which then causes economic growth and inflation

to rise. (Yakita 579-592)

On the surface this may not mean much to child labor given that Yakita is more

concerned with inflation rate and capital accumulation. Inflation rate plays into wage rigidities

which is a plays into child poverty. The interesting connection is that wage rigidities are less

important when the inflation rate is low while a high inflation rate is correlated with longer

lifespans. This creates a conundrum for child labor because wage rigidities can be practiced but it

helps that inflation is low at the detriment of life expectancy which is extremely important in

poor countries. The reason this is important is because child labor is usually borne out of

impoverished countries where life expectancy is low in comparison to wealthier countries. There

is a middle way out of this conundrum, however, through a steady inflation rate that still allows

for economic growth that is preferably at the benefit of adults which would increase life

expectancy and mitigate wage rigidities at the pareto optimal level.

Article 9:

Much of child labor is also created out of the increasing globalization phenomenon that

has become to dominate all economies. According to Eric Edmonds of Dartmouth College did a

study that found that, “A casual cross-country comparison supports the view that child labor

stems from poverty. In the world’s poorest nations with per capita incomes below $1,500 in

1998, it is not unusual to find over 30% of children working. In contrast, child labor is rare in

countries with per capital incomes above 7,000 U.S. Dollars. Per capita income of the U.S. in

1998 was approximately $30,000. Thus, parents in countries that are not even a quarter as

wealthy as the U.S. are able to keep their children from having to work.” (Edmonds 29). What

Eric Edmonds is suggesting is that child labor is a poverty problem. What is important to keep in

mind is that as much as wages play a role in poverty it is also on countries to provide a safety net

which Edmonds does not go into. The inclusion of an economic safety net would be optimal to

have it could maintain economic growth at pareto optimal level in regard to wage rigidities and

life expectancy which would alleviate many economic woes.

Article 10:

The last point of interest is discussing real wages and high inflation. Benedkt Brauman

suggest that real wages fall due to high inflation. This is caused by the decline in capital stock

and through the shift in relative prices ("IMF Staff Papers" 123-147). What this causes is a real

wage drop that exceeds the decline in real gdp per capita. This may not seem like much but it

plays into child labor in the same it plays into wage rigidity and life expectancy. The high

inflation rate decrease real wages and gdp per capita which slows economic growth. This slow

economic growth maintains and continues to keep those who are impoverished which maintains

the use of child labor since households lose their buying power and have to continue to send

children to work to maintain a steady income.

Conclusion:

Child labor is often kept from the public eye because it is seen as a problematic issue to

overcome. It is also often seen as abhorrent in the public eye because the parent can be seen as

evil even though parents do not wish to send their child to work. In this case it is a matter of

economic survival where the parent sends the child to work. Economic growth is heavily tied

into the reality of child labor since it is practiced in impoverished countries where economic

growth has been slowed due to being losers. This paper has thoroughly explored how the

macroeconomic effects have an effect upon the microeconomic realities that many households

have to go through. Child labor can be determined by slow economic growth which depresses

wages but at the same time can be seen as a choice that the parents make to continue to maintain

economic growth and well-being of the household despite the choice is more inefficient than just

having an adult work. There is a common thread that can be seen through all the economic

models is for a macroeconomic policy that promotes economic growth that is then passed on to

adults where their real wages arecontinually rising.

Citations

"High Inflation and Real Wages."IMF Staff Papers. 51.1 (2004): 123-147. Print.

<http://www.jstor.org/stable/30035866>.

Edmonds, Eric. "Globalization and The Economics of Child Labor." NeueZürcherZeitung.

(2002): 29. Print.

Yakita, Akira. "Life Expectancy, Money and Growth."Journal of Population Economics. 19.3

(2006): 579-592. Print.

Goette, Lorenz, UweSunde, and Thomas Bauer. "Wage Rigidity: Measurement,Causes and

Consequences ." Economic Journal. 117.524 (2007): 499-507. Web. 28 Apr. 2013.

Zhang, Junsen, and Jie Zhang."Fertility and Wage Rates in an Overlapping-Generation

Model."Canadian Journal of Economics. 30.1 (1997): 224-234. Web. 28 Apr. 2013.

Huizinga, Frederik. "An Overlapping Generations Model Of Wage Determination."

Scandinavian Journal Of Economics . 92.1 (1990): 81-98. Web. 28 Apr. 2013.

Ranjan, Priya. "An Economic Analysis of Child Labor."Economics Letters. 64. (1669): 99-105.

Web. 28 Apr. 2013.

Basu, Kaushik, and Pham Van."The Economics of Child Labor."American Economic Review.

88.3 (1998): 412-427. Web. 28 Apr. 2013.

Baland, Jean-Marie, and James Robinson. "Is Child Labor Inefficient? ." Journal Of Political

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