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The Economics of Child Labor: Reply

By KAUSHIK BASU AND PHAM HOANG VAN*

Kenneth A. Swinnerton and Carol Ann Rog- of policy-making. We draw attention, in particu-
ers (1999) have drawn attention to the policy of lar, to two caveats.
redistribution as an instrument of eliminating The problem with SRs formal recommenda-
child labor in an economy. They point out that tion is that it is not practicable. No matter what
in our model (Basu and Van, 1998), whenever value takes in the entire range of models they
there exists an equilibrium in which no children consider, to wit, (0, 1], the redistribution
work, there must exist some profit-sharing rule involved is massive because all profit must ac-
among the citizens such that if that rule were crue to the workers. But their suggestion, inter-
effective then in no equilibrium would children preted as a general appeal to redistribution as an
be found working. instrument of curbing child labor, is appealing
Their result is valid and important for design- and deserves attention. In particular, it suggests
ing policy. It is, however, easy to misunder- that a system of taxing profits and transferring
stand. Hence, Section I is a comment on the some of the benefits to the workers may be a
interpretation of this result. Section II shows good way to encourage workers to withdraw
that the result may not be as widely applicable their children from the work force. In practice
as appears at first sight. There is a general one can go further and make the transfer con-
model, of which their model and ours are two ditional on children being withdrawn from the
polar extremes. Reality lies in between. labor force. Bangladeshs Food-for-Education
Program in which participating households re-
I. Interpretation ceive monthly food rations (as long as they send
their children to school) is, in a way, a similar
The kind of redistribution that Swinnerton and program, especially because there is evidence
Rogers (henceforth, SR) write about concerns the that this incentive has resulted in parents with-
ownership of firms. In their model, workers own drawing their children out of the labor force
shares; so profits may accrue to the workers. In an (Martin Ravallion and Quentin Wodon, 1999).
equilibrium in which profits are high, workers The second caveat to be kept in mind is that
may be sufficiently well off not to want to send what SR strictly show is that (in an economy
their children to work, even though their wages satisfying certain conditions) there exists a dis-
may be low. SR assume that, of the N workers, a tribution of ownership of firms such that no
fraction get all the profit in the economy; and child labor will occur. They do not address the
their model is well defined as long as 0. So a question of how such a distribution can be
world in which some workers own shares but not brought about. It is conceivable that an attempt
all shares are owned by the workers is not even at such redistribution will have a negative im-
possible in their model. While our model de- pact on aggregate output; and that, in turn, can
scribed a polar case in which workers had no share again give rise to child labor. Hence, what SR
in the profits, theirs is the other polar extreme. We derive is a result on the comparative statics of
shall come back to this later; let us here examine alternative distributions and not on the conse-
how their result may be interpreted in the context quences of switching from one distribution to
another. For the latter it is necessary to supple-
* Basu: Office of the Senior Vice President, develop-
ment Economics, World Bank, 1818 H Street, NW, Wash- ment their model with an analysis of how in-
ington, DC 20433, and Department of Economics, Cornell centives are affected by redistribution policy.
University, Ithaca, NY 14853 (e-mail: kb40@cornell.edu);
Van: Department of Economics, 118 Professional Building, II. Generalization
University of Missouri, Columbia, MO 65211 (e-mail:
pham@missouri.edu). Support from the project, Intra-
household Decisionmaking, Literacy and Child Labor To put the above discussion on a more formal
(World Bank, RPO # 683-07), is gratefully acknowledged. footing and to pave the way for a generalization,
1386
VOL. 89 NO. 5 BASU AND VAN: THE ECONOMICS OF CHILD LABOR, REPLY 1387

let us take to be the share of economywide We shall now relax a strong assumption that SR
profits that accrue to workers in the aggregate. used and we had used in our earlier work (because
(The notation and model structure, unless ex- it was harmless in that context). As before, we
plicitly specified otherwise, is the same as in assume that if the income of a household from
Swinnerton and Rogers, 1999.) Hence, the div- nonchild labor sources (in brief, adult income)
idend earned by each dividend-receiving house- is less than 2s, the child works; if it exceeds 2s, the
hold is given by / N and the income child does not work; and (unlike in our previous
earned by a household in which only the adult work), if it is exactly equal to 2s, then the house-
works is given by w / N. It is now easy hold is indifferent between sending and not send-
to see that if we work with the assumption ing the child to work. Basically, we are now
0, we will get the Basu-Van model; whereas if abandoning the arbitrary tie-breaker assumption
we set 1, we get the SR model. This that we had used in our earlier work. It is easy to
clarifies that SRs model is not a general one, of show that there exists a continuous utility function
which Basu and Van (1998) is a special case. which generates this kind of behavior, even when
Instead, of the class of models described by child labor supply can be chosen from a contin-
[0, 1], SRs model and ours are two polar spe- uum (Basu, 1999).
cial cases. What is important is to analyze the Consider now the following inequality:
most realistic case in which can take any
value in (0, 1), that is, workers earn some of the (3) YN, 2s Y0, .
profits in the economy, but not all.
As in the Basu-Van model, SR focus on the equi- Check that (3) can be valid, for instance, if
librium in which all children work or no children 1. This is a direct consequence of SRs (5b).
work. What they do not remark on is that in their Hence, it is entirely possible that the kind of
model there may not exist either of these two kinds equilibrium that SR talk about (where all or no
of equilibria. However, whenever such equilibria do children work) may not exist. Interestingly, in
not exist, there must exist another equilibrium in their model, whenever that happens, there must
which some children work and some do not. We exist another equilibrium in which some chil-
shall call it a hybrid equilibrium. This is of some dren work.
interest because it generates what is true in reality Observe that C* [0, N] is an equilibrium
(namely, that the children of only some workers amount of child labor if Y(C*, ) 2s. This is
work), starting from an ex ante homogeneous model. because Y(C*, ) 2s implies that, when C* chil-
To understand this better, and at the same dren work, households are indifferent between send-
time not to be encumbered by unnecessary com- ing their children to work and not sending them to
plications, assume 1 and define Y(C, ) to work. Hence, if C* households send their children to
be the income earned by a household that does work and N C* do not, then no household stands
not send its child to work in an economy in to gain by altering its behavior. If C* (0, N), we
which C children work. Clearly, call it a hybrid equilibrium.
Since we are considering the case where (3)
C, w is true, we know that C* 0 or N. Next since
(1) YC, w , f and f are continuous functions, Y is continu-
N ous. Hence, there must exist C* such that Y(C*,
) 2s. This establishes the existence of a
where (C, w) is the total profit, when C hybrid equilibrium.
children work, and w is the wage rate. Inserting To understand some of its properties, differ-
the full expression for profit and noting that entiate (2) with respect to C,
wage is always equal to marginal product, we
may write (1) as YC,
(4)
C
(2) YC,

fN C N N Cf N C
N N Cf N C
. .
N N
1388 THE AMERICAN ECONOMIC REVIEW DECEMBER 1999

It is now easy to check the following: another in which some children work. This is so
despite the fact that ownership of shares is com-
(i) If 1/(1 ), then Y(C, )/C 0, pletely equitable across all worker households
for all C. ( 1). This means that Corollary 1 of SR is
(ii) If 1, then Y(C, )/C 0, for all predicated on their assumption 1, that is, all
C. profit in the economy accrues to the workers.
(iii) If (1/(1 ), 1), then there exists a
critical value of C, given by C( ) (1 REFERENCES
) N/ , such that:
Basu, Kaushik. The Intriguing Relation be-
YC, /C 0, for all C C and tween Adult Minimum Wage and Child
Labour. Economic Journal, 1999 (forth-
YC, /C 0, for all C C . coming).
Basu, Kaushik and Van, Pham Hoang. The Eco-
It follows from (iii) that, whenever (1/(1 nomics of Child Labor. American Economic
), 1), we can find a value of s such that there Review, June 1998, 88(3), pp. 41227.
will exist three labor-market equilibria, one in Ravallion, Martin and Wodon, Quentin. Does
which no children work and two hybrid equi- Child Labor Displace Schooling? Evidence
libria in which some children work. Moreover, on Behavioral Responses to an Enrollment
of these two hybrid equilibria, one must be Subsidy. Mimeo, World Bank, 1999.
stable. This, in turn, implies that, even if we Swinnerton, Kenneth A. and Rogers, Carol Ann.
ignore the unstable equilibria, as long as The Economics of Child Labor: Comment.
(1/(1 ), 1), we can always find an s such that American Economic Review, December
there is one equilibrium with no child labor and 1999, 89(5), pp. 1382 85.