Child Labor Standards and Trade Policy

Srinivasan (1996), Maskus (1997), Ranjan (2001) and Zimmermann and Pallage (2000) do not consider trade policy as the best measure to enforce international child labor standards. Rather they propose income transfers from developed countries which should be used for providing consumption support to the families of poor children in develop-ing countries in order to compensate them for the foregone earndevelop-ings of children attend-ing school.

Srinivasan (1996) considers that a standard, which is treated as a non-traded good that affects consumers” welfare, diverts resources (capital and labor) from production. He assumes a set of countries producing and consuming two goods where each country’s social welfare function contains consumption of the two goods and the level of an econ-omy wide labor standard. In this setting, a Pareto optimum is characterized as the solu-tion to maximizasolu-tion of a positively weighted sum of the individual countries” utilities.

He shows that the Pareto optimum would be a competitive free trade equilibrium. Srini-vasan then extends his analysis by including an international minimum standard which, as a result of an international consensus, represents an additional restriction in the opti-misation problem where he also allows for the possibility that citizens of one country care about the labor standards in other countries. He shows that, even in this case, a Pareto optimum is characterized by free trade. Since each country’s choice of labor standard has externalities on citizens of other countries which may be internalised by appropriate domestic policies, only international income transfers and domestic taxes or subsidies are required to induce the appropriate level of labor standards needed to sus-tain a Pareto optimum in each country. Therefore, the implementation of an interna-tional minimum standard does not call for deviation from free trade through a social

clause as long as Pareto optimality is the objective, there is willingness to make income transfers between nations, and externalities are internalised in each country.

While Srinivasan assumes that a low labor standard in a developing country has a nega-tive impact on people in developed countries only, Maskus (1997) considers child la-bor to cause an externality in developing countries with child lala-bor as well. Maskus develops a partial equilibrium model assuming a small open developing economy which produces an adult labor intensive exportable final good and another capital intensive importable final good. Furthermore, Maskus considers that the country also has an in-formal sector producing a non-traded input used for production of the adult labor inten-sive good with the informal sector output being produced only by child labor. As Brown, Deardorff and Stern (1996), Maskus considers that children are employed be-yond a socially optimal level where this optimum reflects preferences for a certain level of child labor standards in the form of minimum age requirement for children being employed in a country. Since the informal sector is difficult to regulate by means of standards, an import tariff imposed by the rest of the world on the adult labor intensive good intensive of the developing country may result in a narrowing of the gap between the poor nation’s optimal level of child employment and its actual non-optimal level.

Maskus points out, however, that this measure would impose efficiency costs from the tariff and worsen the developing country’s terms of trade which might exceed the gain in social welfare caused by reducing child employment. Hence, Maskus concludes that a lump-sum tax which the rest of the world levies on itself for purposes of compensating the developing country for removing underage workers would be a more effective route to reduce child labor employment in line with preferences in the rest of the world pro-vided that the people in developed countries care about child labor standards abroad.

Ranjan (2001) introduces a new aspect into the question of whether trade policies should be used to enforce international child labor standards by basing his analysis on household behaviour with regard to child labor supply decisions instead of analysing the issue at a national level. He draws on his model which analyses the correlation between child labor and inefficient capital markets (see section 3.2.1.) and extends it in several ways. He modifies it by developing an overlapping generations general equilibrium set-ting where a small open economy produces two final goods with skilled labor and two types of unskilled labor which are child labor and adult unskilled labor. One of the

goods employs more skilled labor relative to unskilled labor while the opposite holds for the other good. Each individual is assumed to live for two periods - in the first with his parents, in the second with his own children – and be endowed with a certain level of talent or ability differing across persons which is defined as the amount of human capital that an individual can acquire upon going to school. For each level of ability there is a threshold level of parental income such that households below that threshold send their children to work. Since the incidence of child labor is typically high in poor countries that have a comparative advantage in the production goods intensive in the use of unskilled labor, the impact of trade sanctions on factor prices in such a country is to reduce the unskilled wage and to increase the skilled wage through the standard Samuelson-Stolper effect. This in itself would increase the returns to schooling and hence induce altruistic parents to send their children to school. However, a decline in the unskilled wage reduces the income of unskilled parents and in turn increases the incidence of child labor for children of the unskilled will increase. It is shown that by taking both of these effects into account, trade sanctions with the purposes of enforcing international child labor standards may fail to reduce the incidence of child labor. Since a trade sanction may not lower the incidence of child labor and a trade restricting policy leads to welfare losses by preventing specialization, he concludes that the case for trade policies to deal with the issue of child labor is a weak one. Instead, he proposes a policy which provides consumption support to the families of poor children in order to com-pensate for the foregone earnings of children attending school.

In order to show that transfers from developed countries can abolish child labor in a poor country, Pallage and Zimmermann (2000) develop a two-county growth model with human capital as the engine for growth. They assume overlapping generations where persons live for two periods, give birth to children, and allocate their children’s time endowment to school or to work optimally. The endowment with human capital of an adult is a function of her initial level of human capital differing across the two coun-tries, the time spent at school and the level of human capital of her parent. Their model allows for multiple equilibria where one country is settled at a stable, high human capi-tal steady state and the other one is characterized by a stable poverty trap with child labor and poor schooling. In the rich country, parents dislike child labor at home and abroad whereas parents in the poor country dislike child labor at home only, which im-plies that the “poor” exerts an unilateral externality on the “rich” through the use of education versus child labor. Pallage and Zimmermann show that in such a set-up a

transfer from the rich country, optimally chosen by the parents in this nation, may lessen the need for child labor in the poor country, increase its level of human capital and help it move out of the poverty trap.

The model of Chaudhouri and Mukhopadhyay (2003), however, suggests that such transfers used to finance education of poor urban families’ children may not result in a reduction in the incidence of child labor in all sectors of an economy but rather to an increase in the incidence of child labor in urban areas. They adopt a general equilibrium small-economy model with three sectors where production coefficients are fixed: a rural sector where an export good is produced with adult and child labor and an urban capital-intense sector. The urban capital capital-intense sector is subdivided into a formal sector where an import-competing good is produced and an informal sector which produces with the help of child labor an internationally non-traded intermediate good used for the produc-tion of the import good. They find that a policy of free educaproduc-tion financed by transfers in this setting first increases the share of urban school children and lowers urban child labor supply, which results in the shrinking of the urban informal sector. This in turn releases capital which then gives rise to an expansion of the urban sector at the expense of the rural sector due to it being relatively capital-intense. Since expected urban income will then rise, there will be a migration of rural families to the urban areas. Due to the number of migrated families being larger than the number of new jobs in the urban for-mal sector, there will be an increase in poor adults being unemployed or working in the informal sector for a lower wage compelled to send their children to work. After all, there will be a higher supply of child labor compensating the initial decrease in child labor supply in the urban sector.

A principal-agent approach is applyed by Brown (2000) in order to analyse whether international labor standards violation should be linked with trade disciplines and whether both monitoring and enforcement tasks should therefore be assigned to one single acency such as the WTO. Brown uses a model of incentives for a set of multi-task multi-principal agencies which are considered to be able to enforce previoulsy established trade and labor standards by establishing a penalty for each deviation from the pre-set standard. In case of a linkage between labor and trade standards violations she shows that, in a single agency, penalties for violating labor standards may be overpowered with respect to the optimal, i.e. global welfare maximizing penalty due to the utility from labor standards enforcement being typically smaller to developing

from labor standards enforcement being typically smaller to developing countries rela-tive to developed countries.

The implication of all these models is that even if international child labor standards might improve world’s welfare, trade policies will not be the first best measures to en-force this harmonization from a welfare-theoretic perspective. The models suggest that transfers from developed countries to developing countries plagued by child labor, which compensate those underdeveloped nations for adopting international child labor, would be the most efficient means to accomplish a compliance with harmonized child labor standards.