Credit constraints and the phenomenon of child labour

2006

Origins and Consequences of Child Labour Restrictions: A Macroeconomic Perspective* In this paper we investigate the positive and normative consequences of childlabour restrictions for economic aggregates and welfare. We argue that even though the laissez-faire equilibrium may be inefficient, there are usually better policies to cure these inefficiencies than the imposition of a child-labour ban. Given this finding, we investigate the potential political-economic reasons behind the emergence and persistence of child-labour legislation. Our investigation is based on a structural dynamic general equilibrium model that provides a coherent and uniform framework for our analysis.

Development Policy Review, 2002

This article considers a competitive general equilibrium model of a small, open less developed economy which exports products using child labour, the supply of which varies inversely with the rate of unemployment in the adult labour market. The effects of policies such as trade sanctions and the subsidisation or protection of adult labour are analysed. It is suggested that the former may actually aggravate the child labour problem, if the unemployment effect dominates the wage effect. On the other hand, theoretical analysis indicates that trade and fiscal policies influencing the effective producers' price of the products of adult labour might be a more effective approach to the problem.

2004

In this paper we construct a dynamic heterogeneous agent general equilibrium model to quantify the effects of child labor legislation on human capital accumulation and the distribution of wealth and welfare. Crucial model elements include a human capital externality in the market sector, an informal home production sector in which child labor laws cannot be enforced, uninsurable idiosyncratic income risk, borrowing constraints, and endogenous wage and interest rate determination in general equilibrium. We calibrate the model to US data around 1880 and find that the welfare consequences for individual households of a transition to policies that restrict child labor or provide tax-financed free education depend crucially on the main source of a households' income. Whereas households with significant financial asset holdings unambiguously lose from any government intervention, high-wage workers benefit most from a ban on child labor, while low-wage workers benefit most from free education. Based on a utilitarian social welfare function, the introduction of free education results in substantial welfare gains, in the order of 3% of consumption, mainly because it leads to higher human capital accumulation. A child labor ban, in contrast, induces (small) welfare losses because it reduces income opportunities for poor families without being effective in stimulating education attainment.

Applied Economics, 2010

It is generally assumed that credit has a positive effect on children's schooling among poor households. This paper shows that need not be the case when households obtain credit for investment purposes. In fact, investment loans may not have any effect on the likelihood of schooling for children who work in their family business. Our estimates confirm that this is the case; credit used to finance investments has no effect on the odds of schooling for employed children. This may be because investment loans increase children's labor productivity, which in turn increases the opportunity cost of schooling. The results of this study suggest that improving access to credit may not, by itself, constitute a solution to the problem of child labor in developing countries.

2012

In this note, we construct a four sector static general equilibrium model of a small open economy with special consideration to the incidence of child labour. The paper examines the impact of FDI on the output levels of different sectors and also on the incidence of child labour. Here we have shown the possibility of expansion in the incidence of child labour. Finally we have shown that economic growth of our small open economy may immiserize due to trade liberalization.

Journal of Economic Growth, 2004

This paper is concerned with the institution of debt bondage and child labor employment in the context of an agrarian economy with overlapping generations. The model explores the principal-agent interaction between landlords and tenants, and identifies a set of reasons why households put children to work in response to the need to service outstanding debts, only to realize that child labor work is "exploited", and households are made strictly worse off in general equilibrium. Debt bondage in one generation is further shown to leave spillover effects, and contribute to the cycle of debt, bonded child labor and poverty across generations. In this context, the effectiveness of trade sanctions as a policy response to bonded child labor is evaluated. Contrary to expectations, a trade ban can set off a sequence of increasing indebtedness among agrarian households that offset the intended (static) disincentives to employ child labor.

The Manchester School, 2007

Empirical evidence suggests that the incidence of child labour taken as a whole has declined in the developing countries with economic growth due to foreign capital. But, in some high-growth-prone areas, the problem has been on the rise. A pertinent question is why liberalized investment policies have produced dissimilar results in different cases. The present paper is intended to provide an answer to the above question using a three-sector general equilibrium framework with two informal sectors and a non-traded final commodity. The paper is also designed to investigate the efficacy of an education subsidy policy and a lump-sum tax on the richer people in controlling the problem of child labour. We find that the effects of different policies on child labour crucially hinge on the relative intensities in which child labour and adult labour are used in the two informal sectors. However, we find that on the whole a policy of subsidy on education is more effective in comparison with the policy of economic growth with foreign capital in eradicating the prevalence of the evil in the system.

Manchester School, 2007

Empirical evidence suggests that the incidence of child labour taken as a whole has declined in the developing countries with economic growth due to foreign capital. But, in some high-growth-prone areas, the problem has been on the rise. A pertinent question is why liberalized investment policies have produced dissimilar results in different cases. The present paper is intended to provide an answer to the above question using a three-sector general equilibrium framework with two informal sectors and a non-traded final commodity. The paper is also designed to investigate the efficacy of an education subsidy policy and a lump-sum tax on the richer people in controlling the problem of child labour. We find that the effects of different policies on child labour crucially hinge on the relative intensities in which child labour and adult labour are used in the two informal sectors. However, we find that on the whole a policy of subsidy on education is more effective in comparison with the policy of economic growth with foreign capital in eradicating the prevalence of the evil in the system.

2015

Economic shocks have been shown to affect child labor and particularly so when households fail to access credit. This paper endeavours to assess whether access toagricultural labor markets also reduce the impact of shocks on child labor. Using panel data from Tanzania, we confirm that households respond to transitory productivity shocks by changes in child labor, but that (1) child labor increases with increases in rainfall, (2) it increases less when households have access to a labor market and (3) the agricultural labor market seems more efficient than the credit market to smooth rainfall shocks. These findings are consistent with the theoretical model offered in the paper. They highlight that imperfect agricultural labor markets are important determinants of child labor.

SSRN Electronic Journal, 2000

This paper constructs a dynamic heterogeneous agent general equilibrium model to quantify the effects of child labor laws on human capital accumulation and the distribution of welfare. We find that the welfare consequences of a policy reform for agents depend crucially on the main source of household income. Households with large asset holdings would never support government intervention. High-wage workers benefit most from a ban on child labor, while low-wage workers benefit most from mandatory education. Utilitarian social welfare increases to a greater extent with mandatory, publicly financed education than with a child labor ban or a combination of both policies.