ESSAYS ON CHILD LABOR, PRODUCTIVITY, AND TRADE

Transcription

1 ESSAYS ON CHILD LABOR, PRODUCTIVITY, AND TRADE By KRISTIAN ESTEVEZ A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA 200

2 200 Krstan Estevez 2

3 To my famly, for the love and support they provde 3

4 ACKNOWLEDGMENTS I would lke to thank Elas Dnopoulos, whose gudane paved the way for ths researh. I would also lke to thank Steven Slutsky, Rhard Romano, Mark Rush, James Seale, and the Department of Eonoms at the Unversty of Florda for suggestons and adve that have proved to be nvaluable. Ths researh would also not have been possble were t not for the groundwork lad by Kaushk Basu, Erk Edmonds, Nna Pavnk, Kenneth Swnnerton, Carol Ann Rogers, and all others who have worked trelessly to researh ways to end hld labor. Lastly, I would lke to thank my wfe for readng ths dssertaton more tmes than s probably healthy. 4

5 TABLE OF CONTENTS page ACKNOWLEDGMENTS... 4 LIST OF TABLES... 7 LIST OF FIGURES... 8 ABSTRACT... 9 CHAPTER THE ECONOMICS OF CHILD LABOR... Supply of Chld Labor... 2 Demand for Chld Labor NUTRITIONAL EFFICIENCY WAGES AND CHILD LABOR... 5 The Model... 6 Household Deson... 7 Produton Modern setor Agraran setor Steady-State Equlbrum Comparatve Stats Foregn Dret Investment Trade Santons... 3 Eduaton Improvements Mgraton Subsdes Chld wage subsdes Eduaton subsdes Conluson CHILD LABOR AND FIRM HETEROGENEITY... 4 The Bas Model Consumer Demand Produton Chld Labor Demand Frm Value Solvng the Benhmark Case... 5 Aggregaton Free Entry and Ext Solvng the Model when

6 Free Entry and Ext Enforement Tradtonal ndustry ase Modern ndustry ase Intra-ndustry Trade Free Entry and Ext Trade Lberalzaton Trade Lberalzaton n Tradtonal and Modern Setors... 7 Conluson INCIDENCE OF CHILD LABOR IN A NORTH-SOUTH MODEL OF TRADE The Model Consumpton Produton n the North Exportng Frms n the North... 8 North-South Free Trade Equlbrum Produton n the South Frm Value for Southern Frm Free-Entry Condton for Northern Frms Share of Frms Indene of Chld Labor Comparatve Stats S Inrease n Chld-Labor Enforement, S One Tme Inrease n the Populaton n the South, L... 9 I Inrease n the Rate of Imtaton, Trade Costs Conluson APPENDIX A FIRST-ORDER CONDITIONS B PROOF OF UNIQUE STEADY-STATE EQUILIBRIUM C SIMULATION WITH ENDOGENOUS RATE OF IMITATION... 0 LIST OF REFERENCES BIOGRAPHICAL SKETCH

7 LIST OF TABLES Table page 2- Summary of Comparatve Stats Results

8 LIST OF FIGURES Fgure page 2- Steady-state equlbrum Inrease n FDI Welfare among households wth an nrease n FDI Welfare among households wth trade santons Welfare of households wth emgraton of sklled workers Chld wage subsdes Steady-state equlbrum Inrease n enforement when Inrease n enforement when Effet of trade n the steady-state equlbrum Autarky equlbrum Trade equlbrum Inrease n enforement Inrease n populaton Pre ndes and trade osts Chld labor and trade osts

9 Char: Elas Dnopoulos Major: Eonoms Abstrat of Dssertaton Presented to the Graduate Shool of the Unversty of Florda n Partal Fulfllment of the Requrements for the Degree of Dotor of Phlosophy ESSAYS ON CHILD LABOR, PRODUCTIVITY, AND TRADE By Krstan Estevez Deember 200 The problem of hldren workng around the world s not a new phenomenon, but rather a legay of poverty that s slowly beng eradated as nomes nh up n developng eonomes. Whle the ndene of hld labor has been on the delne, awareness of the ssue has grown n part due to globalzaton. Ths has led to debates as to the best way to ure the problem one and for all. Chapter desrbes what leads to hld labor, brefly revews the eonom lterature of the last 20 years, and summarzes the poly presrptons resultng from the researh. Chapter 2 develops a dynam, overlappng generatons general-equlbrum model of a small open eonomy where the demand and supply of hld labor are analyzed. There are two goods: a modern good produed by sklled labor and aptal, and an agraran good produed by unsklled adult labor, hld labor, and land. The model predts that an nrease n foregn dret nvestment (FDI) and mprovements n eduaton wll derease the ndene of hld labor. Emgraton of sklled (unsklled) workers wll redue (nrease) the supply of hld labor, whle trade santons wll redue the demand for hld labor. Chld wage subsdes have an ambguous effet on the ndene of hld labor, whle eduaton subsdes are effetve n redung hld labor. 9

10 Chapter 3 examnes the role of frm heterogenety n the demand for hld labor. The effet of hld labor enforement and trade lberalzaton wll depend on how a frm s produtvty parameter affets the relatve produtvty between adult and hld workers. When the produtvty elastty of adult and hld labor are equal, all frms hoose the same proporton of hld workers, and only an nrease n enforement wll redue the demand for hld labor. When the produtvty elastty of hld labor s hgher (lower) than that of adult labor, trade lberalzaton wll result n a derease (nrease) n the demand for hld labor. Last, Chapter 4 studes how nternatonal trade affets the ndene of hld labor n a North-South model of trade. Innovatng frms n the North are heterogeneous and dffer n ther margnal osts, whle mtatng frms n the South are homogeneous and may use hld labor n produton. The ndene of hld labor depends not only on domest fators, suh as the relatve wage of adult and hld labor n the South, but also on the endogenous rate of nnovaton n the North and the exogenous rate of mtaton by Southern frms. Redutons n trade osts derease the number of Southern frms and wll lower the demand for hld labor. An nrease n the exogenous rate of mtaton by Southern frms wll redue the total number of varetes of the dfferentated good and derease the demand for hld labor, whle an nrease n the populaton n the South wll nrease the demand for hld labor. 0

11 CHAPTER THE ECONOMICS OF CHILD LABOR Over the last deade, the ndene of hld labor has been delnng steadly worldwde. However, the number of hldren lassfed as eonomally atve (over 9 mllon as of 2006) s stll too hgh and hghly onentrated n the poorest natons. The number of eonomally atve hldren aounts for 4% of the hldren n the world, but n sub-saharan Afra and Asa, the number s loser to 25% and 7%, respetvely (ILO 2006b). Furthermore, many of the hldren employed outsde the agrultural setor work n unsafe and sometmes hazardous ondtons. In reent years, the nrease of globalzaton has rased awareness of the problem of hld labor n the ndustralzed world. The Internatonal Labour Organzaton (ILO) passed Conventon 29 n 930, whh prohbts all forms of fored and ompulsory labor. In 973, the ILO passed Conventon 38, whh sets a mnmum age for hldren dependng on the type of work. Lght work, meant as work that does not sgnfantly detrat from shoolng, s lmted to hldren 3 years or older, whle hazardous work s lmted to hldren 8 and older. Many ountres where hld labor s most vsble, suh as Inda, Nepal, and Thaland, have natonal laws lmtng or bannng the use of hld labor. Many others have ompulsory eduaton laws to ensure that hldren are reevng an eduaton but that do not outlaw the use of hld labor outsde ompulsory shoolng. Unfortunately, laws outlawng hld labor and ompulsory eduaton laws have shown to have a mnmal effet n low-nome ountres (Krueger 996). The passage See Internatonal Labor Organzaton (ILO) 2006a. For a omprehensve survey of the hld labor lterature, see Basu (999); Rogers and Swnnerton (200); and Brown, Deardorff, and Stern (2003).

12 of ompulsory eduaton laws s endogenous to the urrent state of hld labor, and t has been shown that these laws are usually passed followng a delne n hld labor, not before t. Even programs that are meant to dsourage hld labor by provdng nentves to poor famles to replae work wth shoolng have proved to be neffetve due to the dffulty n montorng omplane. Supply of Chld Labor The man justfaton for government nterventon to elmnate hld labor s that of externaltes. The soal returns to eduaton have been shown to exeed prvate returns, so a stuaton n whh hldren work rather than attend shool s not soally optmal. In ths ase, elmnatng hld labor maxmzes soal welfare. The best way to aheve that objetve eludes polymakers. Most eonomsts would agree that eonom growth that redues poverty s guaranteed to end hld labor, but hld labor n tself s what prevents eonom growth n the poorest ountres. Not surprsngly, Krueger (996) found a strong orrelaton between a ountry s per apta GDP and the employment rate of 0- to 4-year-olds. Most theoretal models make the assumpton that parents are the sole deson makers wth regard to hldren s eduatonal opportuntes. The eduaton of hldren an thus be treated as an asset: a means of nreasng future nome at the expense of present onsumpton. Poverty s one of the auses of hld labor, but not neessarly the man one. Basu and Van (998) ntated the theoretal nvestgaton nto the ndene of hld labor when they assumed: ) famles would not send ther hldren to work f the famly s nome wthout hld labor was above some subsstene level; 2) adult labor and hld labor were perfet substtutes n produton. In ther model, they proved the possble exstene of multple stable equlbra: an equlbrum wth low 2

13 wages where hldren worked and ompeted wth unsklled adults, and another wth hgh wages and no hld labor. The model suggests that a short-term ban on hld labor mght be used effetvely to jolt the eonomy to the favorable equlbrum wth no hld labor, but t wll only be suessful f the ban nreases adult wages suffently. Lately, a greater mportane has been plaed on the role of redt market mperfetons n developng ountres. Baland and Robnson (2000) vewed hld labor as a means for low-nome households to transfer future nome to the present when borrowng was not avalable. Parents thus weghed ther hldren s future nome aganst the forgone nome nurred from eduaton. Ranjan (200) and Jafarey and Lahr (2002) also foused on the lak of avalable redt as a reason why parents resort to sendng ther hldren to work. Ranjan (200) used an overlappng generatons model where households dffer n ther talent level and found that the ndene of hld labor nreases as redt avalablty dereases and as nome nequalty nreases. Jafarey and Lahr (2002) also found that the ndene of hld labor dereases as aess to redt markets nreases. Demand for Chld Labor In the developed world, t has been debated whether trade poles are effetve at lowerng the nentve for frms to use hld labor. Staunh advoates aganst the use of hld labor beleve that ountres wth lax labor standards should be santoned. Unfortunately, proof of the use of hld labor n produton s dffult to fnd, and n those ountres where hld labor s most rampant, exstng laws aganst hld labor often go unenfored. Some eonomsts worry that trade santons mght nrease the ndene of hld labor by punshng unsklled adult workers n the export setor, redung the 3

14 nome of low-sklled households and possbly forng hldren nto more dangerous work (Maskus 997). Whle studes have examned the supply of hld labor from households, the demand for hld labor has not reeved the same amount of attenton. Ths s partly due to the lak of frm data, whh makes empral researh dffult. The few empral studes, suh as Busse and Braun (2004), tend to use maro-level data to fnd a relatonshp between hld labor and trade openness. Busse and Braun fnd that an nrease n trade openness s generally assoated wth a derease n the ndene of hld labor, but the effet dsappears after ontrollng for nome. Ths suggests that the method by whh trade lberalzaton dereases hld labor s through nreasng parental nomes, whh then dereases the supply of hld labor. The theoretal models that have examned the demand for hld labor have foused on the effets of trade lberalzaton, trade santons, and foregn dret nvestment. Gupta (2000) bult a barganng model wth an effeny wage funton that determnes the produtvty of hldren gven the wage pad to the hld. In that model, parents were assumed to be selfsh wth regard to the hld s nterest and are able to bargan wth frms over the hld wage and the effeny wage that s pad to the hld n the form of food. Dnopoulos and Zhao (2007) explored how trade lberalzaton affets the demand for hld labor n a model wth effeny wages. They fnd that both trade lberalzaton and FDI that nreases the output of the modern good derease the ndene of hld labor. 4

15 CHAPTER 2 NUTRITIONAL EFFICIENCY WAGES AND CHILD LABOR Ths hapter bulds a theoretal model that examnes both the supply and demand of hld labor to examne the varous poly optons avalable to ombat the problem. Eonomsts have mostly examned the ssue of hld labor and globalzaton through the use of theoretal models due to the dffulty of aqurng data for empral studes. The few publshed empral papers have foused on household surveys n small regons n developng ountres, but t s unertan whether ther results are applable elsewhere. For nstane, Edmonds and Pavnk (2005) found that globalzaton led to an nrease n the pre of re n Vetnam, whh dereased the ndene of hld labor even though hld labor s used heavly n the produton of re. On the other hand, Kruger (2007) found that globalzaton had the opposte effet, nreasng the ndene of hld labor n the offee setor n Brazl even though globalzaton led to an nrease n the pre of offee beans and n the wages n that setor. Gupta (2000) and Dnopoulos and Zhao (2007) publshed papers that fous predomnately on the demand for hld labor. Both studes used hld nutrtonal effeny wages, a prate ontnued n ths hapter, whh allows for the hld wage to be fxed. In Dnopoulos and Zhao (2007), market mperfetons exst suh that there s an underemployment of hldren, and the nome that guardans reeve from sendng ther hld to work s exogenous. Unfortunately, ths assumpton appears to be hghly unrealst, gven that one of the man results n that paper, the effet of subsdes, has been shown to have a sgnfant mpat on the supply of hld labor. Ths paper endogenzes the deson that parents make about whether to eduate or employ ther hldren and thus allows for the supply of hld labor to depend on the returns that 5

16 parents reeve from sendng ther hldren to work. The premum that parents reeve s endogenously determned and allows the model to analyze the effet that poles have on both the supply and demand of hld labor. The model shows that poles enated to redue the ndene of hld labor must arefully explore both the supply and demand omponents of hld labor. A poly lke hld wage subsdes, whle meant to redue the supply of hld labor, wll also nrease the demand for hld labor by redung the ost of hrng one unt of hld labor. Ths an result n an nrease n the overall ndene of hld labor. Eduaton subsdes gven to unsklled households are a better poly that wll redue the supply of hld labor wthout affetng demand. Ths result s supported by Shultz (2004) and Ravallon and Wodon (2000). Trade santons, whh redue the demand for produts made wth hld labor, wll redue the demand for hld labor. Chld wage subsdes, whh n Dnopoulos and Zhao (2007) ause an nrease n the ndene of hld labor, have an ambguous effet when one aounts for the redued supply of hld labor. Ths hapter s organzed as follows. Seton 2 desrbes the dynam general equlbrum model, startng wth the haraterzaton of the hld shoolng deson made by parents and onludng wth a desrpton of the two produton setors n the eonomy. Seton 3 solves for the steady-state equlbrum, and Seton 4 analyzes the effet of domest and nternatonal poles on the ndene of hld labor. Smulatons are also nluded to examne welfare and dstrbutonal effets of the varous poles. Seton 5 onludes wth some fnal remarks. The Model The model s a dynam, overlappng-generatons model that endogenzes the ndene of hld labor. The model has two homogeneous goods: an agraran good 6

17 that s produed usng land and unsklled adult and hld labor, and a modern good that uses sklled labor and aptal n ts produton. The produtvty of sklled workers depends on ther nnate ablty, whh s assumed to dffer among households. Perfet ompetton n the produton setor guarantees that adult workers are pad ther margnal revenue produt of labor. The ost of one unt of hld labor s splt between the amount gven to hldren n the form of meals, whh affets ther produtvty, and the parental premum gven to parents for the employment of ther hld. Ths paper bulds on two reent theoretal papers n the hld-labor lterature. Ranjan (200) uses dfferng talent levels to dfferentate households, assumng that a household s talent remans onstant aross generatons. Ths hapter assumes that households are dfferentated by ablty levels, whh determnes the sklled wage f the ndvdual attended shool as a hld. It s also assumed that the ablty of households s onstant aross generatons. Dnopoulos and Zhao (2007) utlze hld nutrtonal effeny wages to fx the hld wage. Ths leads to the adult sklled wage beng fxed and s used to derve the demand for hld labor. A key dfferene between ths paper and that of Dnopoulos and Zhao s that n ths paper the parental premum s endogenously determned by barganng between parents and frms. Household Deson Household nome s the prmary reason that parents resort to sendng ther hld to work. Ths s referred to as the luxury axom n Basu and Van (998) sne eduatng a hld s onsdered an unaffordable luxury to poor famles. In ths model, households are dfferentated by ther nnate ablty level, whh subsequently determnes ther adult wage f they attended shool as hldren. 7

18 For notatonal onvenene, the populaton of eah generaton s normalzed to. A famly onssts of one adult and one hld, so the overall populaton n the eonomy s 2. The ablty of eah famly follows a unform dstrbuton, where the range of abltes s 0,. Parents are assumed to know ther hld s ablty beause t s the same as ther own. The assumpton that parents and hldren have the same ablty s for notatonal smplfaton, whle the assumpton that parents are aware of ther hld s ablty s a plausble one. Chldren sent to work reeve some form of eduaton before they beome old enough to work, whether t s n prmary shoolng or home shoolng, and parents are able to gauge ther hld s apttude n these early stages. It s assumed that parents are about the future well-beng of ther hldren as well as the famly s urrent onsumpton of a modern and agraran good. Ths assumpton s a standard one used n the hld-labor lterature 2. Let V t be the parent s utlty funton at tme t : V U( C, C ) V (2-) t Xt Yt t where s the level of altrusm that the parent has toward hs hld s future utlty, and U( C, C ) represents the famly s urrent onsumpton of the agraran and modern Xt Yt good, respetvely. For smplty, t s assumed that all famles have dental preferenes. Wrtng Equaton 2-n terms of pres and nome gves the followng ndret utlty funton: V Z( p, p I ) V (2-2) t Xt Yt, t t 2 See Basu (998), Ranjan (200), and Jafarey and Lahr (200). 8

19 Inome s dependent on the hld shoolng deson and the household s ablty level, where nome at tme t for any famly s equal to: I t b wt f parent sends hld to work b f parent sends hld to shool (2-3) where b s the parent s nome, w t s the hld wage pad n knd to hld workers at tme t, and wt s the parental nome from sendng hs/her hld to work at tme t, where wll be referred to as the parental premum. It wll be assumed that hldren are fed at shool f parents hoose not send them to work, and f hldren are sent to work, the frm wll pay hldren n-knd by provdng them food. The amount of food that they provde wll determne the produtvty of the hld, as wll be dsussed n the produton seton n ths hapter. To smplfy the model and to allow for the supply of hld labor to be determned expltly, a Cobb-Douglas spefaton s used to represent the parent s utlty from urrent onsumpton 3 : U( x, y) x y (2-4) Ths leads to the followng ndret utlty funton from Equaton 2-2: ri Z( p, I) P (2-5) where r ( ) and P p p s the pre ndex. x y It s neessary to examne n the steady-state equlbrum both the hld-shoolng deson of parents who are sklled workers and those who are unsklled. A household 3 The results of the model hold generally for any homothet utlty funton where nome enters lnearly. A possble extenson of the model would be to norporate a utlty funton n whh the margnal utlty of nome dereases as nome nreases, whh would allow for nome effets n the determnaton of the supply of hld labor. 9

20 s haraterzed by two fators: the parent s skll level and the household s ablty level,, whh s onstant aross generatons. Ths allows for a gven household s hldshoolng deson to be wrtten n the form ( ) whether the parent s sklled ( equaton: V, where H, L H ) or unsklled ( L). orresponds to A sklled parent s hld-shoolng deson s summarzed by the followng V ( ) Max Z(( ) w ) V ( ), Z(( ) w w ) V ( ) (2-6) H H H H C L where the frst part represents the parent s utlty f he sends hs hld to shool, and the seond part represents the parent s utlty f he sends hs hld to work. To fnd the rtal ablty level that makes a sklled parent ndfferent between sendng the hld to shool versus work, we equalze Equaton 2-6 usng the Cobb-Douglas spefaton n Equaton 2-4: Z(( ) w w ) Z(( ) w ) V ( ) V ( ) H C H H L r( w C ) V(, ) V(0, ) P (2-7) (2-8) Let H represent the rtal ablty level that solves Equaton 2-8. For all sklled households wth households wth, parents wll hose to send ther hld to shool. For all sklled H, parents wll opt to send ther hldren to work. H Smlarly, an unsklled parent s hld shoolng deson s summarzed by: V ( ) Max Z( w ) V ( ), Z( w w ) V ( ) (2-9) L L H L C L 20

21 where the frst part one agan orresponds to the parent eduatng hs/her hld, and the seond part to sendng the hld to work. Equalzng to fnd the rtal ablty level, L, yelds: Z( w w ) Z( w ) V ( ) V ( ) (2-0) L C L H L Usng the Cobb-Douglas spefaton, Equaton 2-4, gves us the same equaton as the one for sklled parents, Equaton 2-8. Sne Equaton 2-8 represents the hld shoolng for both sklled and unsklled households, H, and the parent s deson over whether to eduate hs hld or not L s ndependent of whether the parent s eduated hmself. The ablty level that solves Equaton 2-8 s represented by H L, where rtal values wll be denoted wth an astersk. In the steady-state equlbrum, values of the endogenous varables must reman onstant. To solve for n the steady-state equlbrum, we an use the orrespondng value funtons. In the steady-state, t must be true that the frst term n Equaton 2-6 solves an eduated parent s maxmzaton problem sne sklled workers are gong to hoose to eduate ther hld. Lkewse, the seond term n Equaton 2-9 must solve an unsklled parent s maxmzaton problem. The followng must therefore be true n the steady-state equlbrum: V ( ) Z(( ) w ) r ( ) w P H H H V ( ) L Z( wl wc ) r ( wl wc ) P (2-) (2-2) 2

22 Substtutng Equatons 2- and 2-2 nto Equaton 2-8, we an solve for the rtal ablty level that determnes the supply of hld labor: r( wc ) r ( ) wh ( wl wc ) P P w w 0, wh L Max (2-3) Famles wth ablty level eduate ther hldren, whle famles wth ablty level send ther hldren to work. Sne a unform dstrbuton of abltes s assumed, and the populaton of hldren s normalzed to, the supply of hld labor s equal to the rtal ablty level: wl w S S C f ( ) d C Max 0, (2-4) 0 wh As the unsklled wage, w L, and the parent s nome from sendng ther hld to work,, nreases, the supply of hld labor also nreases. As the sklled wage, the level of altrusm,, nreases, the supply of hld labor dereases. Produton w H, or The produton setor s haraterzed by perfet ompetton, whh ensures that fators are pad ther margnal produtvtes. Captal omplements sklled labor n the produton of a modern good, whle land omplements unsklled adult and hld labor n the produton of an agraran good. The produton funtons n both setors are represented by onstant returns to sale tehnologes of Cobb-Douglas form. 22

23 Modern setor Sklled labor and aptal are used n the produton of the modern good. The produtvty of a sklled worker wll depend on hs ablty level. Usng spef setor aptal whh s fxed n the modern setor allows for the analyss of foregn dret nvestment and ts effet on the returns to eduaton and the parental shoolng deson. The produton of the modern good s desrbed by the followng Cobb-Douglas produton funton: Y F H K H K (, ) (2-5) where H ( ) d 4 s the total human aptal stok of sklled workers and s the produtvty of a sklled worker gven hs ablty. The pre of the modern good wll at as the numerare. The proft funton for a frm produng the modern good s: Y H K wy H ry K (2-6) Frms maxmze Equaton 2-6 wth respet to the employment of sklled workers and setor-spef aptal, yeldng the followng frst-order ondtons: dy K wh 0 dh H (2-7) dy K ( ) rk 0 dk H (2-8) 4 For an evaluaton of the ntegral, see equaton (33). 23

24 The wage pad to sklled workers and the rental of aptal are gven by Equatons 2-7 and 2-8. Sne a sklled worker wth ablty has produtvty equal to, hs nome wll be equal to ( w. Agraran setor ) H Output n the agraran setor s determned by the amount of unsklled labor, both adult and hld, and the amount of land avalable. Studes by the Internatonal Labor Organzaton (2006a) have found that the majorty of hldren who forgo shoolng tend to work n rural settngs, so the use of land as a omplement to hld labor s warranted. The use of nutrtonal effeny wages, not unlke that used n Stgltz (976), desrbes how the produtvty of hld laborers s dependent on the amount of food gven to them n the form of meals. The nutrtonal effeny funton, whh determnes the produtvty of hldren, hw ( ), s an nreasng and onave funton wth respet to the onsumpton of food (the n-knd hld wage), and t s bounded from above. (.e., there s a lmt to how produtve hldren an be, and sne t s assumed that hld labor s always less produtve than adult unsklled labor, 0 hw ( ).) w Gupta (2000) developed a model where the produtve effeny of hld labor depends on the amount of food ther employer gves them. He found that when employers maxmze ther profts, ths leads to the ommon effeny wage equaton that fxes the hld wage. Dnopoulos and Zhao (2007) utlze nutrtonal effeny wages for hldren along wth effeny wages for sklled adults to analyze the effets of globalzaton and domest poles on the demand for hld labor. funton: The produton of the agraran good s determned by the followng produton 24

25 X G( L, C) L h( w ) C T (2-9) where hw ( ) s the nutrtonal effeny funton of a hld worker; s a hld equvalent salng onstant that equates how one unt of adult unsklled labor orresponds wth one unt of hld labor; α s a produtvty parameter; and C, L, and T are the amount of hld labor, adult unsklled labor, and land, respetvely. Frms n the agraran setor maxmze ther proft wth respet to land, adult unsklled labor, hld labor, and the hld wage pad to hldren n the form of meals: p L h( w ) C T w L ( ) w C r T (2-20) X X L C T Although hldren are pad w C n the form of food, frms have to pay the premum, w, to parents, whh makes the total ost of one unt of hld labor equal to ( ) w C. Maxmzng Equaton 2-20 yelds the followng frst-order ondtons: d X T px wl 0 dl L h( w ) C (2-2) d X T pxh( w ) ( ) w 0 dc L h( w ) C (2-22) d X T pxh'( w) C ( ) C 0 dw L h( w) C (2-23) d X T ( ) px rt 0 dt L h( w ) C (2-24) If we ombne Equatons 2-22 and 2-23, we get the standard result n the nutrtonal effeny wage lterature: hw ( ) '( ) w h w (2-25) 25

26 Ths leads to the hld wage, w, beng fxed n the steady-state equlbrum for a gven nutrtonal effeny funton. For agraran frms to maxmze profts, they must pay hld workers a wage that equates ther margnal produtvty of labor to ther average produtvty. Combnng Equatons 2-2, 2-22, and 2-25 solves for the adult unsklled wage n terms of the hld wage, the parental premum, and the hld s produtvty: w L ( ) w (2-26) hw ( ) To determne the relatonshp between the fxed hld wage and the rental of land, we ombne Equatons 2-2 and 2-24 to determne the relatve rental of land n proporton to the unsklled adult wage: r T L h( w ) C ( ) wl T (2-27) Equatons 2-2 and 2-27 lead to the zero-proft ondton n terms of the unsklled adult wage, the produtvty parameter,, and the pre of the agraran good, p X : ( ) X L T p w r (2-28) Ths zero-proft ondton, along wth Equaton 2-26, determnes the rental of land: ( ) w T ( ) px hw ( ) r (2-29) And, usng Equaton 2-27, the demand for hld labor, D C : L (2-30) hw D C p ( ) ( ) X h w w T ( ) 26

27 The demand for hld labor s nreasng n the amount of land n the agraran setor and the pre of the agraran good, and s dereasng n the amount of adult unsklled labor and n the parental premum. Substtutng Equatons 2-7 and 2-26 n the household shoolng deson, Equaton 2-4, the supply of hld labor an be derved n terms of the parental premum and the parameters of the model: C ( ) w w H S h( w ) K (2-3) The supply of hld labor s nreasng n the parental premum and n the supply of adult sklled workers and s dereasng n the amount of aptal n the modern setor and n the pre of the modern good. Steady-State Equlbrum In the steady-state equlbrum, Ct Ct for all t 0. The amount of hld labor at any tme t has to be n the range C 0,. Chldren who work beome unsklled laborers n the next perod, whle hldren who attend shool beome sklled laborers workng n the modern setor. The supply of unsklled workers s equal to the quantty of hld labor n the prevous generaton, Lt Ct, whle the amount of sklled workers n effeny unts s: H t 2 3 Ct 2Ct ( ) d (2-32) 2 2 Ct Substtutng these values nto Equatons 2-30 and 2-3 and wrtng the equatons n terms of the nverse supply and demand of hld labor n the steady-state equlbrum yelds: 27

28 hw ( ) X hw ( ) D p h( w ) w T C (2-33) S K C hw ( ) 2 h( w ) hw ( ) 3 2 w C C 2 (2-34) These equatons not only determne the ndene of hld labor n the steady-state equlbrum, but they also ensure an nteror equlbrum, C 0,. C S C D C C Fgure 2-. Steady-state equlbrum As C 0, the demand for hld labor goes to nfnty beause the sarty of unsklled labor drves the unsklled wage, and the parental premum, upward. The same holds as C. In ths ase, most of the populaton s employed n the agraran setor, and the margnal produtvty of a unt of sklled labor goes to nfnty. As shown n Fgure 2-, the parental premum and the ndene of hld labor n the steady-state are determned by the nterseton of Equatons 2-33 and

29 Comparatve Stats In ths seton, the omparatve stats are omputed to show how globalzaton and domest poles affet the ndene of hld labor. The paper frst examnes how an nrease n foregn dret nvestment an mpat the ndene of hld labor before explorng the effets of domest poles. When applable, smulatons were onduted to analyze the effet of the dfferent poles on welfare. The parameters used n the smulatons were.75, p.3,.5, w.2, hw ( ).7,.6, K 0, T.9,.5, and 5. Usng these fgures, the ndene of hld labor s roughly 2% of the hld populaton, and the parental premum,, s 2, meanng that parents reeve w.4 for sendng ther hld to work, whh s a lttle less than half of the adult unsklled wage. Foregn Dret Investment Globalzaton an mpat an eonomy by allowng an addtonal nflux of foregn aptal and nvestment. In ths model, foregn dret nvestment mpats the parent s shoolng deson by nreasng the margnal produt of sklled labor. The nrease n the sklled wage, w H, shfts the supply of hld labor leftward, as shown n Fgure 2-2. Ths results n a derease n the ndene of hld labor and an nrease n the parental premum. 6 An nterestng observaton s that the nrease n the parental premum not 5 Sne the populaton s normalzed to, the amount of land and aptal an be thought of the land per apta and the aptal per apta, respetfully. The values of K and L were alulated usng statsts from the Phlppnes, where K s an approxmaton of the total aptal dvded by the populaton, and T s the amount of usable land (n square mles) dvded by the populaton. The other values were arbtrarly assgned, but hanges n these values do not qualtatvely mpat results. 6 Davs and Voy (2007) and Edmonds and Pavnk (2005) have studed the relatonshp between FDI and trade openness wth the ndene of hld labor whle ontrollng for endogenous fators. They also fnd a negatve relatonshp between hld labor and foregn dret nvestment. 29

30 only nreases the famly s nome from sendng the hld to work, but t also nreases the adult unsklled wage through the relatonshp n Equaton S C S C 0 0 D C C Fgure 2-2. Inrease n FDI C 0 C Consequently, an nrease n foregn dret nvestment not only has the beneft of dretly dereasng the ndene of hld labor, t also nreases the nomes of poor famles. Ths result an better be seen by omparng the ndret utlty of households, Equaton 2-2, before and after the nrease n foregn dret nvestment n Fgure 2-3. The nrease n aptal redues the ndene of hld labor from 22% to 9% (sne a unform dstrbuton of abltes s assumed), and all households are better off than prevously. Sklled households wth the hghest abltes beneft the most from an nrease n foregn dret nvestment sne the hgher-sklled wage benefts workers wth the hghest produtvty. The results on the ndene of hld labor depend on the fat 30

31 that aptal s used only to produe the modern good. If aptal were used n the produton of both goods, then the results would be ambguous. Fgure 2-3. Welfare among households wth an nrease n FDI Trade Santons Internatonally, trade santons have been reommended as a way of punshng ountres that use hld labor n the produton of traded goods. By redung the nternatonal demand for the good n queston, trade santons attempt to lower the nternatonal demand, whh orresponds to a drop n the pre of the agraran good n the model. The fall n p X lowers the demand for hld labor, Equaton 2-33, and lowers the ndene of hld labor n the steady-state equlbrum. However, famles wth low ablty may be punshed beause santons redue nomnal nomes by dereasng the parental premum and the adult unsklled wage. 3

32 Fgure 2-4. Welfare among households wth trade santons As shown n Fgure 2-4, the effet of trade santons on unsklled household utlty s ambguous due to the fat that the lower agraran pre redues the pre level and an nrease real nome. Whether the derease n the pre of the agraran good negates the fall n unsklled households nomes depends on the relatve demand for the agraran good. Sklled nomnal wages fall due to the nrease n sklled workers, but real nomes may rse due to the derease n the pre of the agraran good. Eduaton Improvements One way governments an nrease hld enrollment n shools s to mprove the effeny of the eduaton system, whh makes sklled workers more produtve. By nreasng the margnal produtvty of sklled workers, the nomes of sklled workers and the returns to eduaton wll derease the supply of hld labor. Ths an be modeled by hangng Equaton 2-32, the amount of sklled adult labor n terms of effeny unts, to: 32

33 H ( ) d (2-35) where represents mprovements n eduaton that nrease the produtvty of sklled workers. The supply of hld labor then beomes: C S ( ) w H w h( w ) K (2-36) whh s unambguously less than the supply of hld labor n Equaton 2-3. Smlar to the ase of foregn dret nvestment, an nrease n the eduaton effeny parameter,, wll shft the supply of hld labor leftward, leadng to an nrease n the parental premum and a derease n the ndene of hld labor. Welfare effets are also smlar, but there are greater gans for adult sklled households due to the nrease n produtvty. Mgraton Emgraton of sklled workers s ommon n developng ountres as wages for sklled workers are hgher n developed eonomes. Here, the paper examnes how ths mgraton affets the ndene of hld labor. Frst, assume that the sklled workers who mgrate are those wth the hghest abltes sne they would beneft the most from movng. Let (,) represent the sklled worker wth the lowest ablty who dedes to reloate. Therefore, the effetve unts of sklled labor n Equaton 2-32 beomes: H t Ct 2Ct ( ) d (2-37) 2 2 Ct whh s unambguously smaller than Equaton 2-32 sne. Replang Equaton 2-37 n the supply of hld labor equaton yelds: 33

34 C S Ct 2C t 2 2 ( ) w w h( w s) K (2-38) whh s less than Equaton 2-34 and represents a derease n the supply of hld labor n the steady-state equlbrum. Lke the ase of foregn dret nvestment, emgraton of sklled labor auses the supply of hld labor to shft leftward, redung the ndene of hld labor n the steady-state and nreasng the urrent nome of unsklled famles. When sklled labor mgrates, a vod of sklled labor s left n the modern setor whle the amount of aptal remans fxed. Ths nreases the margnal produtvty of sklled workers and thus the sklled wage. The nrease n the returns to eduaton redues the number of parents who are wllng to forgo sendng ther hld to shool. As shown n Fgure 2-5, the welfare of unsklled households s unhanged, but the welfare of sklled households (assumng.9 ) nreases. Fgure 2-5. Welfare of households wth emgraton of sklled workers 34

35 Subsdes Last, the paper examnes how two dfferent types of subsdes affet the employment of hldren n the eonomy. The frst type analyzes fnanal assstane gven dretly to hld workers n the form of meals (Dnopoulos and Zhao, 2007). The seond type, whh has been emprally tested, deals wth subsdes gven dretly to low-nome famles to enourage them to send ther hldren to shool. Chld wage subsdes The hld wage subsdy s assumed to ome from an exogenous soure, whh mght nlude foregn ad from developed ountres and ad from non-governmental organzatons. If the subsdy were fnaned by the government, we would then have to examne the sope of government and the way n whh the subsdy s fnaned. A dret subsdy gven to hldren n the form of meals effetvely hanges an agraran frm s proft maxmzng problem, Equaton 2-20, to: ( W X X ) L ( ) C T p L h w s C T w L w C r T (2-39) where W s s the value of the wage subsdy. When the agraran frms maxmze ther profts wth respet to the amount of hld labor and the wage pad to hld labor n terms of food, the standard nutrtonal effeny wage equaton beomes: h w s w ( ) W '( ) W h w s (2-40) Ths hld wage subsdy nreases the average produtvty whle dereasng the margnal produtvty. Ths auses frms to lower the hld wage that they pay n terms of food, hangng the steady-state equatons to: C ( ) D D W C p X h( w s ) ( ) w T W h w s (2-4) 35

36 C S 2 S S C C 3 2 ( ) w 2 w W h( w s ) K (2-42) The demand for hld labor, Equaton 2-4, nreases, whle the supply of hld labor, Equaton 2-42, dereases, as shown n Fgure 2-6. The effet of the hld wage subsdes on the ndene of hld labor s ambguous sne the nrease n the parental premum s ountered by a derease n the hld wage. Chld wage subsdes lead to a derease n the adult unsklled wage, and ts effet on the sklled wage depends on whether the level of hld labor hanges or not. S C S C 0 0 D C D C 0 C 0 C Fgure 2-6. Chld wage subsdes Ths result dffers from that found n Dnopoulos and Zhao (2007). In that paper, the supply of hld workers s perfetly elast. Ths amounts to the supply of hld labor beng represented by a horzontal lne at the exogenous parental premum. The hld wage subsdy would therefore only nrease the demand for hld labor, leadng to an 36

37 nrease n hld labor n the agraran setor. Wth land nstead of sklled labor n the agraran setor and an endogenous supply of hld labor, the opposte holds true. The nrease n the average produtvty of hld laborers dereases the adult unsklled wage, whh therefore nreases the relatve returns to eduaton and dereases the supply of hld labor. Ths leads to an ambguous hange n the ndene of hld workers. Eduaton subsdes Some ountres have used eduaton subsdes to redue the ndene of hld labor. Shultz (2004) examned a Mexan program alled Progressa, n whh households n a randomly seleted low-nome loalty were gven nome subsdes f they sent ther hldren to shool. Ths resulted n an nrease n average shoolng for hldren n the loaltes that reeved the subsdy ompared wth smlar loaltes that dd not. Lkewse, Ravallon and Wodon (2000) examned a smlar eduaton subsdy n Bangladesh and found that although nreases n shool enrollments ame mostly at the expense of hld lesure, the eduaton subsdy dd have a sgnfant effet on redung the ndene of hld labor. To norporate an eduaton subsdy nto the model, t s neessary to look bak to the supply of hld labor equaton, Equaton 2-3, and add the subsdy, E s, that parents would reeve f they send ther hld to shool. The household maxmzaton problem beomes: E s wl w Max 0, wh (2-43) 37

38 The eduaton subsdy beomes an opportunty ost to parents who send ther hld to work. Ths hanges the supply of hld labor equaton to: K C h( w ) s h( w ) ( ) ( ( ) 3 C 2 C 2 E S 2 h( w ) w h w w h w (2-44) An eduaton subsdy wll ause a leftward shft of the hld-labor supply urve and therefore wll have an outome smlar to an nrease n FDI. Unsklled famly nome wll beneft twe: one through a dret nrease n household nome aused by the eduaton subsdy, and then through an ndret nrease n the unsklled wage aused by the derease n hld workers. Table 2-. Summary of Comparatve Stats Results Supply of Demand for Indene of Welfare of Unsklled Chld Labor Chld Labor Chld Labor Households Domest Poles Eduaton Dereases Unhanged Dereases Inreases Mgraton of Sklled Dereases Unhanged Dereases Inreases Chld Wage Dereases Inreases Ambguous Inreases Eduaton Dereases Unhanged Dereases Inreases Trade Poles Foregn Dret Dereases Unhanged Dereases Inreases Trade Santons Unhanged Dereases Dereases Ambguous Table 2- summarzes the omparatve stats results and the effets that poles have on the welfare of unsklled households. As shown, most poles that redue the ndene of hld labor wll lead to an nrease n the welfare of unsklled households, even though some of these poles redue the wage of unsklled workers. 38

39 Conluson Chld labor s a major problem n developng ountres, but one that looks to be n delne around the world. Stll, some forms of hld labor mght always exst as long as parents fal to sustan ther famly usng only ther nome, and as long as frms have aess to ths heap form of labor. The only way to eradate the problem truly s to ensure that famles an sustan adequate nomes wthout hld labor earnngs, and that there are hgh rewards for shoolng so that famles an esape the vous rle of poverty that plagues parts of the developng world. Ths paper develops a dynam general-equlbrum model of hld labor that norporates the parental shoolng deson, whh determnes the supply of hld, labor and the proft-maxmzng ondtons of prvate frms, whh determne the demand for hld labor. The use of hld nutrtonal effeny wages allows for the development of an atve market for hld labor that s dependent on the sklled and unsklled wages n both setors, the amount of aptal and land n the eonomy, and parental preferenes toward eduatng ther hldren. Ths allows us to study the mpat of domest and foregn poly and ts effets on both the demand for and supply of hld labor. Inreases n foregn dret nvestment nrease the returns to eduaton and lead to a derease n the ndene of hld labor. In the long run, ths nreases the human aptal stok n future generatons and leads to hgher sustaned eonom growth. Ths fndng s onsstent wth smlar works by Dnopoulos and Zhao (2007). Ths paper dffers from Dnopoulos and Zhao n regard to the mpat of hld wage subsdes. Whle Dnopoulos and Zhao fnd that hld wage subsdes nrease the ndene of hld labor by nreasng ther omplement of produton n the agraran setor, ths paper fnds that hld wage subsdes nrease the nomes of unsklled households but have an 39

40 ambguous effet on the ndene of hld labor. Fnally, ths paper shows that eduaton subsdes an unambguously derease the ndene of hld labor by gvng famles a monetary nentve to send ther hldren to shool. 40

41 CHAPTER 3 CHILD LABOR AND FIRM HETEROGENEITY The phenomenon of hld labor s a stubborn problem that ontnues to plague the least-developed ountres and ontrbutes to the perpetual yle of poverty from whh many natons have been unable to break free. Although the ndene of hld labor has been steadly delnng over the last deade, t stll remans staunhly prevalent n the poorest natons. The researh on the auses of hld labor has grown over the last twenty years but has been prnpally rooted n one sde of the story, namely the desons of households that determne the supply of hld labor 7. Edmonds and Pavnk (2005b), Dnopoulos and Zhao (2007), and Ks-Katos (2007) are a few examples of reent theoretal papers that have examned hld labor from the demand sde. Ths allows for the analyss of how trade lberalzaton, FDI, and other global fators affet the demand for hld labor. These papers assume that hldren work n setors that produe goods that are traded n an nter-ndustry trade settng. In dong so, they assume that the wages pad to hldren (or to the famly of the hldren) reflet the produtvty of the hld worker. A study onduted by the Internatonal Labour Organzaton (2007) on hld wages and produtvty reveals that dfferenes n adult and hld wages are not refleted n ther produtvty dfferenes. Even n setors where hldren were nearly as produtve as ther adult ounterparts, the hld wage was anywhere from one-sxth to one-fourth the wage pad to adult unsklled workers (ILO 2007). 7 Basu and Van (998), Ranjan (2000), and Jafarey and Lahr (2002) are just a few notable papers that have examned the supply of hld labor from the household perspetve. For a omprehensve survey of the hld labor lterature, see Brown, Deardorff, and Stern (2003). 4

42 The am of ths paper s to analyze the short-run demand for hld labor n the presene of frm heterogenety and ntra-ndustry trade. The model developed by Meltz (2003) wll be used as the foundaton for the model n ths hapter, whh wll endogenously determne the utoff produtvty level needed for a frm to enter an ndustry and the export utoff produtvty level that makes t proftable for a frm to export ts good. As wll be shown, setor haratersts, partularly how frm produtvty affets the relatve produtvty of hld and adult workers, wll determne whether trade lberalzaton an remedy or exaerbate the ndene of hld labor. Intra-ndustry trade, whle not as prevalent n developng ountres as n ndustralzed ountres, s stll a sgnfant soure of trade between smlar developng natons and therefore must be examned wth regard to hld labor. 8 Heterogeneous frms engagng n ntra-ndustry trade n developng ountres tend to be loated n setors haraterzed by sgnfant amounts of hld labor. Balassa (998) examned the role of frm heterogenety n developng ountres. He looked at the level of ntrandustry trade n Latn Amera and noted that ntra-ndustry trade was prevalent among smlar South Ameran ountres n setors suh as textles; fabrated metal goods; and paper, lay, and glass produts. Kuera (2002) onluded that hld labor employed n the export setor was mostly loated n textles, apparel, raft produton, and other lght manufaturng n developng ountres, most of the ndustres where ntra-ndustry trade s domnant n the developng eonomes studed by Balassa (998). 8 Baland and Robnson (2000) note the need to onsder frm heterogenety before onludng that a ban on hld labor wll always lead to a Pareto mprovement. Hummels and Klenow (2005) examne the extent of the extensve-margn n 26 ountres and show that n export varety makes up a large perentage of exports for large developng ountres lke Chna (.70) and Inda (.44). 42

43 Empral work nto the demand for hld labor s relatvely lakng ompared wth the amount of work done on household fators. Unfortunately, the dffulty of aqurng frm level-data on hld labor, neessary to test the results of ths paper s model, s onsderable, and even f t were possble to obtan these data, the survey s relablty would be questonable sne frms have a notable dsnentve to dslose nformaton on ther use of hld labor and the wages pad to ther workers. Usng maro-level data, Kuera (2002), Busse and Braun (2004), and Davs and Voy (2007) have emprally found a relatvely weak relatonshp between trade lberalzaton and hld labor after aountng for hanges n nome. The use of maro-level data does not allow the demand for hld labor to vary by setor, whh ths paper examnes. It s therefore neessary to rely on theory to analyze the mpats of trade lberalzaton on the demand for hld labor, and to aount for the fat that the relatve produtvty of hld workers dffers among setors. Ths hapter s organzed as follows. Seton 2 outlnes the losed model and solves the benhmark ase where the produtvty elastty of adult and hld labor are equalzed. Seton 3 desrbes how the model dffers when adult labor and hld labor dffer n ther produtvty elastty and shows how ths mght affet the ablty of enforement to redue the demand for hld labor. Seton 4 ntrodues trade and shows how trade lberalzaton affets the demand for hld labor n three ases. Last, Seton 5 summarzes the poly mplatons and offers onludng remarks. The Bas Model The model presented below s based on Mar Meltz s (2003) ntra-ndustry trade model. For a frm to enter the market, t frst nurs a fxed entry ost that allows t to ondut researh and development (R&D). One R&D has taken plae, frms dsover 43

44 how produtve they are n manufaturng a unque varety. Frms then hoose the optmal amount of hld labor (n proporton to the amount of adult workers) gven ther produtvty level by maxmzng ther expeted frm value. The use of hld labor n produton lowers a frm s margnal ost, whh nreases the profts earned eah perod, but has the trade-off of exposng the frm to addtonal rsk eah perod. Ths trade-off results n an nteror equlbrum where the proporton of hld labor s greater than or equal to 0 but s bounded from above. Last, frms dede whether ther expeted frm value wll be able to over ther fxed ost of produton. If a frm s expeted value exeeds ts fxed produton ost, then t wll hoose to produe. If a frm s expeted value s less than the fxed produton ost, then the frm wll hoose to ext the ndustry. In the steady-state equlbrum, there exsts a unque utoff produtvty level suh that frms wth produtvty equal to or above that threshold wll hoose to produe, and frms wth produtvty below the threshold wll ext the market. Consumer Demand The preferenes of a representatve onsumer are gven by a C.E.S. utlty funton over a ontnuum of goods, : U q( ) d (3-) whh wll be maxmzed subjet to the representatve onsumer s budget onstrant. 9 Assumng that 0,, ths yelds a demand funton for eah varety,: 9 The Lagrangan and the orrespondng frst-order ondtons are shown n Appendx A. 44