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The Environment and Child The Environment and Child LaborLabor

Chris NeelyChris Neely

The views expressed are my own and do not necessarily reflect official positions of the The views expressed are my own and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, or the Federal Reserve System.Federal Reserve Bank of St. Louis, or the Federal Reserve System.

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TopicsTopics The EnvironmentThe Environment

– The Concern About the Environment and TradeThe Concern About the Environment and Trade

– An Economic Rationale For RegulationAn Economic Rationale For Regulation

– How Economists Think About the Environment.How Economists Think About the Environment.

– The Likely Effect of Trade on the EnvironmentThe Likely Effect of Trade on the Environment

Child LaborChild Labor

– The Facts of Child LaborThe Facts of Child Labor

– A Partial Economic ExplanationA Partial Economic Explanation

– What Can We Do About It?What Can We Do About It?

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WHAT I WILL WHAT I WILL NOT NOT SAY TODAY.SAY TODAY.

The disclaimer still applies: The views expressed The disclaimer still applies: The views expressed are are my ownmy own not those of the Federal Reserve Bank not those of the Federal Reserve Bank of St. Louis. of St. Louis.

I will not say that pollution is good. It is not.I will not say that pollution is good. It is not.

I will not say that child labor is good. I would I will not say that child labor is good. I would prefer them to be in school too. prefer them to be in school too.

We will talk about how to think about and solve We will talk about how to think about and solve problems without making them worse. problems without making them worse.

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The Concern About the The Concern About the Environment and TradeEnvironment and Trade

Can the U.S. compete against LDCs with lower Can the U.S. compete against LDCs with lower environmental or labor standards? environmental or labor standards?

Will free trade lead to a “race to the bottom” in Will free trade lead to a “race to the bottom” in which countries competitively reduce their which countries competitively reduce their environmental standards?environmental standards?

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The Economic Rationale for The Economic Rationale for Environmental RegulationEnvironmental Regulation

Economists generally think that markets work Economists generally think that markets work pretty well - given the initial conditions. pretty well - given the initial conditions.

A big exception is the case for environmental A big exception is the case for environmental regulation. This is because pollution imposes regulation. This is because pollution imposes “social costs” which differ from “private costs.” “social costs” which differ from “private costs.”

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The Economic Rationale for The Economic Rationale for Environmental RegulationEnvironmental Regulation

“ “Private cost” for a good or service reflects the Private cost” for a good or service reflects the labor, capital, skill and resources that go into labor, capital, skill and resources that go into making it. making it.

– The private cost of a hamburger reflects the cost of The private cost of a hamburger reflects the cost of raising cattle and wheat, managing a corporation, etc..raising cattle and wheat, managing a corporation, etc..

Social costs may include costs to persons other Social costs may include costs to persons other than the producer or consumer.than the producer or consumer.

– A polluting factory imposes costs on the people who A polluting factory imposes costs on the people who must breathe the air nearby.must breathe the air nearby.

– It is optimal to tax or regulate such pollution.It is optimal to tax or regulate such pollution.

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How Economists Think How Economists Think about the Environmentabout the Environment

Environmental quality is like other goods. Environmental quality is like other goods.

– We reject the notion that environmental harm is an We reject the notion that environmental harm is an absolute moral evil. absolute moral evil.

– We also reject the notion that the environment must be We also reject the notion that the environment must be sacrificed to achieve growth. sacrificed to achieve growth.

– We should balance the cost of controlling pollution We should balance the cost of controlling pollution with the benefit of getting more goods and services.with the benefit of getting more goods and services.

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How Economists Think About How Economists Think About the Environmentthe Environment

Environmental regulation should use market Environmental regulation should use market forces for the most efficient outcome.forces for the most efficient outcome.

– Regulation vs. pollution vouchers.Regulation vs. pollution vouchers.

– This will lower pollution at the least cost. This will lower pollution at the least cost.

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The Likely Effect of Trade The Likely Effect of Trade on the Environmenton the Environment

The key question is: What is the alternative for The key question is: What is the alternative for factories in LDCs?factories in LDCs?

Trade increases income. Richer nations tend to Trade increases income. Richer nations tend to choose higher environmental standards.choose higher environmental standards.

Trade promotes access to better technology for Trade promotes access to better technology for controlling pollution.controlling pollution.

On balance, free trade is likely to increase On balance, free trade is likely to increase environmental quality. environmental quality.

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Child LaborChild Labor

The facts: In much of the world, child labor is The facts: In much of the world, child labor is widespread.widespread.

Children work long hours, at low wages, under Children work long hours, at low wages, under hard conditions. hard conditions.

It would be much better if they could go to school It would be much better if they could go to school instead. instead.

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A Partial Economic ExplanationA Partial Economic Explanation

Child labor is widespread in very poor countries.Child labor is widespread in very poor countries.

Child labor was widespread in the United States - Child labor was widespread in the United States - and much of Europe - until about 1900. and much of Europe - until about 1900.

Why does it exist at some times and places but not Why does it exist at some times and places but not others? There are 2 explanations.others? There are 2 explanations.

– Laws prohibit it in the United States.Laws prohibit it in the United States.

– Economic growth made it unnecessary.Economic growth made it unnecessary.

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A Partial Economic ExplanationA Partial Economic Explanation

As the U.S. grew richer, the average hours As the U.S. grew richer, the average hours worked per week declined. worked per week declined.

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A Partial Economic ExplanationA Partial Economic Explanation

Richer countries tend to work shorter hours.Richer countries tend to work shorter hours.

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A Partial Economic ExplanationA Partial Economic Explanation

Child labor disappears as countries get richer. Child labor disappears as countries get richer.

A partial explanation: Children in poor countries A partial explanation: Children in poor countries work because they have to. work because they have to.

– The alternative is not to have enough to eat. The alternative is not to have enough to eat.

This explanation is too simplistic. Other factors This explanation is too simplistic. Other factors are important too. are important too.

– E.g., Sri Lanka has no child labor but it is very poor. E.g., Sri Lanka has no child labor but it is very poor.

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The Solution?The Solution?

Boycotts or labor standards will put children out of Boycotts or labor standards will put children out of work or at least lower their wages. work or at least lower their wages.

– What will they do: Go to school or starve?What will they do: Go to school or starve?

Pressure on ManufacturersPressure on Manufacturers

– What is the recourse?What is the recourse?

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The Solution?The Solution?

Foreign AidForeign Aid

– Why should it be the responsibility of those Why should it be the responsibility of those countries that trade internationally?countries that trade internationally?

In the long-run, the solution is for poor In the long-run, the solution is for poor countries to become wealthier. This requires countries to become wealthier. This requires free trade and better government.free trade and better government.

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Key IdeasKey Ideas

Economists look on environmental concerns as a Economists look on environmental concerns as a good to be balanced against other concerns.good to be balanced against other concerns.

Market forces are useful in reducing pollution at the Market forces are useful in reducing pollution at the least cost. least cost.

One reason child labor exists is that those countries One reason child labor exists is that those countries are very poor. are very poor.

We must think carefully about solutions to We must think carefully about solutions to problems to make sure they don’t make things problems to make sure they don’t make things worse. worse.

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THE ENDTHE END