Product Quality,Informality, and Child Labor

This paper studies how the interactions between the structure of product demand and relative wages affect the incidence of child labor. One sector (the agrarian) produces a homogeneous good, and the other (the modern) produces a vertically differentiated product. The modern sector is segmented according to quality: high‐quality varieties are produced by formal firms which employ only adult labor, whereas low‐quality varieties are produced by informal firms which employ child labor as well. Differences in tastes and incomes across households generate demand for both high‐quality and low‐quality varieties. Stricter enforcement of child‐labor regulations and increases in minimum wages can have beneficial effects regarding the incidence of child labor and the size of the formal sector. However, since these policies have undesirable welfare effects among segments of wage‐earning households, they may not garner the necessary political support.