Why is child labor illegal?

We present a theory of the emergence of laws restricting child labor or imposing mandatory education that is consistent with the fact that poor parents tend to oppose such laws. We find that if altruistic parents are unable to commit to educating their children, child-labor laws can increase the welfare of higher-income parents in an ex ante sense. On the basis of an empirical analysis of Latin-American household surveys, we demonstrate that per capita income in the country of residence has the predicted effect on child labor supply, even after controlling for other household characteristics.     

Positional concern and low demand for redistribution of the poor

The two observations that (1) some low-income citizens demand low redistribution and (2) as income inequality becomes more severe a larger proportion of citizens make less demand for redistribution (Kelly and Enns (2010)) are counter-intuitive because people oppose redistribution that could be beneficial to them. Understanding the main driving factor that leads to the economic conservatism of the poor is crucial: it guides how policymakers should design redistribution. I show that positional concern can be one of these main factors. When citizens care about their relative position on consumption and their labor productivity is slightly perturbed when a new tax policy is implemented, only middle-income citizens may vote for redistribution. Compared with the prospect of upward mobility hypothesis, I provide a testable prediction for the relationship between economic inequality and the economic conservatism of the poor. If positional concern is the main driving factor, policymakers should focus on increasing the low-income citizens’ standard of living to the middle class; and if the prospect of upward mobility is the main factor then they should focus on minimizing income gaps.     

Structural Features of Female Employment Status and Earnings Mobility: The Experience in Germany

Structural changes in basic economic indicators, changes in traditional role patterns, and in female employment behavior shed light on the performance of the European labor markets in the 90s. This paper focuses on the cyclical sensitivity of women's employment status and earnings position in Germany. Using data from the German Socio-Economic Panel (GSOEP) we test the hypothesis that labor market adjustments are not gender-neutral but affect women's employment status and women's relative earnings position to a greater extent than those of men. Cross-sectional as well as longitudinal analysis indicate positive effects on female employment status and earnings position during a period with worsening economic indicators. Logistic regression analysis confirms an increasing likelihood of an upward earnings mobility for women in the 90s. Notwithstanding these positive trends the results show that - due to social norms and attitudes - women are still discriminated against in the labor market and in terms of their relative earnings position. Thus social policy is called upon to improve women's social and employment conditions.     

Cyclical wage movements in emerging markets compared to developed economies: The role of interest rates

This paper documents that, at the aggregate level, (i) real wages are positively correlated with output and, on average, lag output by about one quarter in emerging markets, while there are no systematic patterns in developed economies, and (ii) real wage volatility (relative to output volatility) is about twice as high in emerging markets compared with developed economies. We then present a small open economy model with productivity shocks and countercyclical interest rates. The model incorporates a working capital requirement and the Jaimovich and Rebelo (2009) preference that allows for flexible parameterization of the strength of income effects on labor supply. The model can account for the high volatility of wage and consumption relative to output and countercyclical trade balances that characterize emerging-market economies. During economic downturns, rising interest rates in emerging markets induce relatively large income effects on labor supply, so households would not reduce their labor input as much even though wages drop significantly.     

Foreign Direct Investment and Domestic Child Labor

Empirical evidence suggests that use of child labor as domestic help has increased significantly in recent years although the overall incidence of child labor across the globe has declined satisfactorily. This should draw the attention of economists and policymakers because domestic child labor is considered as exploitative and in many cases hazardous. This paper purports to explain this apparently perplexing finding theoretically in terms of a three‐sector general equilibrium model with a nontraded sector where only child labor is used to render services to the richer section of the society. The analysis shows how FDI‐led economic growth increases the size of the services sector although it lowers the overall incidence of child labor in the economy and improves the welfare of the poor families that supply child labor. Finally, a composite policy has been recommended that can deal with all three aspects favorably.     

Remittances as a social status signaling device

Like all human beings, migrants may have a concern about their prestige or social status in the eyes of left-home family and friends. They can remit money in order to signal their economic success and increase their status. We show that if migrants’ income is private information, unsuccessful migrants might accept a worsening of their living conditions and send back home large amounts of remittances only in order to make residents believe that they are successful. In some cases, successful migrants can signal their true favorable economic situation by remitting an even larger amount. The game presents various equilibria that differ with respect to the proportion and nature of the migrants who sacrifice consumption opportunities to status revealing actions.     

A revisionist view of the economic implications of child labor regulations

The conventional neoclassical wisdom predicts that banning, restricting, or improving the working conditions of child labor will increase the costs of production, thereby diminishing the competitiveness of those jurisdictions that legislate against child labor. However, from a behavioral theoretical perspective this need not be the case when a productivity differential favoring adult labor exists which at least compensates for the pay differential between child and adult labor, and where the increased cost of child labor is compensated for by their increased productivity. In this case, legislating against child labor will not have the negative economic consequences predicted by the conventional wisdom. The cost of such restrictions, however, will then fall largely on the family income of affected families unless compensated for by sufficient increases in real adult wages, increases in the adult labor force participation rate, or other sources of income. This paper was revised while the author was Visiting Scholar with the Center for North American Studies, Duke University. Thanks go to two anonymous referees and Louise Lamontagne for their comments and suggestions. The standard caveat applies.     

Status, affluence, and inequality: Rank-based comparisons in games of status

We examine the effects of changes in the income distribution in an economy where agents' utility depends both on consumption and on their rank in the distribution of conspicuous consumption. We introduce a new methodology to compare the behavior of agents that occupy the same rank in the two different income distributions but typically have different levels of incomes. Here, an increase in incomes of the least endowed improves their welfare, yet it also increases social competition, making those in the middle to be worse off—even if they have higher incomes as well. As social competition can be lowered by spreading agents apart in income space, we find that an increase in incomes for all, augmented by (weakly) increased income dispersion, constitutes a sufficient condition for Pareto-improvement. We also show that one can have an increase both in income and relative position but still be worse off.     

Consumption taxation, social status and indeterminacy in models of endogenous growth with elastic labor supply

In this paper, we examine the effects of consumption taxation on long-run growth in an infinitely lived representative-agent model of endogenous growth with endogenous labor supply in which the desire for social status induces private agents to care about others’ wealth or consumption levels. This analysis shows that the increase in consumption taxation raises (reduces) the long-run growth rate when the equilibrium path is locally indeterminate (determinate), provided the desire for social status is not too strong in the relative wealth model. By contrast, in the consumption externalities model, the same result holds, if the Frisch labor supply and labor demand curves have the ‘normal’ slopes at their intersection point, while the result is reversed if these two curves have the ‘wrong’ slopes.     

Exploring Alternative Measures of Welfare in the Absence of Expenditure Data

We consider an asset-based alternative to the standard use of expenditures in defining well-being and poverty. Our motivation is to see if there exist simpler and less demanding ways to collect data to measure economic welfare and rank households. This is particularly important in poor regions where there is limited capacity to collect consumption, expenditure and price data. We evaluate an index derived from a factor analysis on household assets using multipurpose surveys from several countries. We find that the asset index is a valid predictor of a crucial manifestation of poverty—child health and nutrition. Indicators of relative measurement error show that the asset index is measured as a proxy for long-term wealth with less error than expenditures. Analysts may thus prefer to use the asset index as an explanatory variable or as a means of mapping economic welfare to other living standards and capabilities such as health and nutrition.     

Indeterminacy in dynamic models: When Diamond meets Ramsey

We consider an aggregate two-periods overlapping generations model with endogenous labor, consumption in both periods of life, homothetic preferences and productive external effects coming from the average capital and labor. We show that under realistic calibrations of the parameters, in particular a large enough share of first period consumption over the wage income, local indeterminacy of equilibria cannot occur with capital externalities alone. It can nevertheless occur when there are only, even very small, vanishing labor externalities provided that the elasticity of capital-labor substitution and the wage elasticity of the labor supply are large enough. We also show that if labor externalities are slightly stronger, but still small enough to be plausible, and the elasticity of labor supply is larger, local indeterminacy occurs in a Cobb-Douglas economy. Finally, we show that a locally indeterminate steady state is generically characterized by an under-accumulation of capital. It follows therefore that while agents live over a finite number of periods, the conditions for the existence of locally indeterminate equilibria are very similar to those obtained within infinite horizon models and that from this point of view, Diamond meets Ramsey.     

Offshoring and Reshoring: The Roles of Incomplete Contracts and Relative Bargaining Power

This paper demonstrates that an increase in bargaining power of Northern firms relative to that of their Southern contractors can trigger reshoring if the North-South wage differential is moderate, such that only industries with a high share of unskilled labor find outsourcing profitable. However, such an increase in Northern bargaining power can increase offshoring if the wage differential is so high that even industries with a low share of unskilled labor also offshore.     

Filial Obligations and Child Labor

The model presented here reproduces the empirical fact that poorer countries show a higher incidence of child labor and time‐intensive care of retired parents, whereas richer countries have negligible child labor and people indulge in money‐intensive care of the old. For that purpose, the effect of social norms of filial obligations on child labor and schooling decisions is analyzed. It is shown that norms of filial obligations are sustainable as an equilibrium in the intergenerational game. Widely discussed contracting problems à la Becker, which allegedly explain underinvestment in schooling by poor households, are thus solved. However, this alone does not induce the elimination of child labor. Technological parameters and relative returns to schooling also play a fundamental role.     

Economic reform and informal wage—a general equilibrium analysis

We attempt to trace the consequences of liberal economic policies on informal wage in a general equilibrium model with formal informal labor markets, wage-differential, vertical linkage and restricted capital movement. In particular, we show that the informal wage, representing income for a vast segment of unskilled labor may actually increase even if more people are employed in the informal segment. This also confirms that a contraction in the formal sector employment and the consequent expansion in the informal segment do not necessarily imply impoverishment of the existing set of informal workers.     

Mortality risks,education and child labor

In this paper, we investigate the role of young adult mortality on child labor and educational decisions. We argue that mortality risks are a major source of risks in returns to education in developing countries. We show that, in the absence of appropriate insurance mechanisms, the level of child labor is inefficient, but it can be too high or too low. It is too high when parents are not very altruistic and anticipate positive transfers from their children in the future. Uncertain returns to education, endogenous mortality or imperfect capital markets unambiguously increase child labor. When the level of child labor is inefficiently high, we also show that a cash transfer conditional on child's schooling can always restore efficiency regarding child labor.     

Work costs and nonconvex preferences in the estimation of labor supply models

Works costs have not been adequately handled in labor supply estimation, likely due to their complexity. We show that, if work costs are not accounted for in the budget and time constraints in a structural labor supply model, they will be subsumed into the data generating preferences. Even if underlying preferences over consumption and leisure are convex, the presence of unobservable work costs can make these preferences appear nonconvex. However, we show that, under plausible conditions, policy relevant calculations, such as estimates of the effect of tax changes on labor supply and deadweight loss measures, are not affected by the fact that estimated preferences incorporate work costs.     

Soviet theories of economic demography: a survey

At this time Soviet demographic scientists maintain the position that population problems may in fact exist temporarily under socialism but that the planning principle will allow society to resolve population problems, through the use of the administrative, moral, and economic levers (subsidies, government policies, propaganda, education) emphasized by Urlanis (1974) and others. For planners to deal effectively with population management, the determinants of fertility and labor force participation must be established. The foundations of Soviet theories of human capital and fertility were laid by several writers. For the sake of simplicity, these are referred to as the Urlanis-Strumilin model, named after 2 pioneer researchers in Soviet demography and manpower economics. The formulations are based upon the writings of Strumlin (1964) and Urlanis (1974), supplemented by writings of numerous other Soviet researchers. Although their models avoid neoclassical terms such as marginal utility and income and price elasticities, they clearly employ these concepts. The Urlanis-Strumilin model, reduced to its basic elements, is a direct household utility maximizing model. The husband and wife, the household decision makers, must select optimal levels of child "quantity," child "quality," leisure, their own human capital (further education and training), and other goods. The Soviet theory recognizes that an increase in household income will increase relatively the demands for income elastic goods. The model postulates that the demand for child quality is inversely related to the price of children. The price of children is the opportunity cost of children, the major element of which is the income foregone by the mother in the course of childbearing and childrearing. The child quantity demand schedule has elastic and inelastic portions. The marginal utility of the 1st child is great. The marginal utilities of higher order children decline substantially. Families with at least 1 child can make substitutions between having more children and raising the quality of children already born. The question is what does the model predict will happen to fertility with economic development. The positive income effect will be limited as increased income is channelled into child quality and other superior goods rather than child quantity. The Urlanis-Strumilin model of labor supply assumes that the household allocates its time among market employment, household production. The model shows that the effect of children on female labor supply is not ambiguous. The presence of young children raises the value of home services and lowers long run market wages, thereby reducing female market labor supply. According to the model, the socialist state can manipulate labor supplies through several channels. It can reduce the value of home services by providing market substitutes. Soviet writers recognize the linkages between labor supply and fertility without formalizing the simultaneous relationship. The comparative statics of the Soviet model are essentially the same as those of the neoclassical model: an increase in "costs" of children will have, at best, a small positive impact on fertility.     

Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences

The effects of consumption and production externalities on economic performance under time non-separable preferences are examined both theoretically and numerically. We show that a consumption externality alone has long-run distortionary effects if and only if labor is supplied elastically. With fixed labor supply, it has only transitional distortionary effects. Production externalities always generate long-run distortions, irrespective of labor supply. The optimal tax structure to correct for the distortions is characterized. We compare the implications of this model with those obtained when the consumption externality is contemporaneous. While some of the long-run effects are robust, there are also important qualitative and quantitative differences, particularly along transitional paths.     

Intra-household labor supply,migration, and subsistence constraints in a risky environment: Evidence from rural El salvador

We investigate the use of intra-household labor allocation as a means of risk coping when subsistence constraints matter in rural El Salvador. We show that households increase the labor supply of its male members to the family farm and abroad in the US after being subjected to adverse agricultural productivity shocks. The latter is the result of a standard substitution effect, whereas the former is the result of subsistence concerns. Theoretically, these results are not at odds with each other if these events differentially impacted rich and poor households. We also show that the earthquakes of 2001 resulted in large reductions in the number of female members who were sent abroad and large increases in hours of domestic labor supplied by female members. We argue that this result is a consequence of subsistence motives because female labor supply at home increased despite lower remuneration.     

Growth,economic structure,and residential distribution of a small city

This article presents a growth model of a small open city with economic structure and geography. The city which is located along a line segment has three, industrial, services and housing, sectors. The spatial growth model of a small city synthesizes the main ideas in some important models in the neoclassical growth theory, urban economics, and the literature of economic growth of small open economies. We show that the dynamic system has a unique equilibrium. We also simulate the motion of the urban economy over time and space. The unique feature of our approach is to treat production activities, economic structure, residential distribution, capital accumulation, and consumption on the basis of microeconomic mechanism as an integrated whole. Our simulation provides some important insights into the processes of the urban economic growth. For instance, under certain conditions, when the industrial sector’s productivity is increased, the wage rate, price of services, capital intensities of the services and industrial sectors, and per-worker output levels of the two sectors are increased. The total labor supply, the capital stocks employed by the three sectors and the labor forces by the service and industrial sectors are all increased. The shares of the three sectors are not affected by the technological change in the long term, even though the shares are initially affected. The per capita consumption level of the industrial goods rises and the consumption level of services falls. The land and housing rents are increased and the consumption of housing per household falls. Moreover, the current account balance tends to be more in surplus and the growth rate is increased.