9. The Political Economy of Domestic Child Labor Policies
10.4. Transfers as a Second Child Labor Policy
In this section we extend the basic model in another manner, namely by introducing a second policy variable, to wit transfers from the North earmarked to financing the schooling costs of poor parents in the South. Such transfers enable parents in the South to send their children to school instead of sending them to work and thus reduce the
ψ = 0
ψ > 0
) 0 (
_c ψ >
w ( 0)
_c ψ = w
* t
wc
negative spillover in the North caused by child labor in the South. We assume that the transfer is levied by a lump-sum tax s on Northern consumers. We denote by z = ncs the total transfer of the North where nc is the number of consumers in the North.
Total supply of child labor is assumed to amount to:
(46)
z LSc wc
= +
γ 1 ,
where γ is the constant slope of the supply function. Foreign financial support z which enables parents to finance the opportunity costs of schooling can be seen to decrease the number of children sent to work at each child wage rate.
Lemma 2: A higher transfer will result in lower child labor employment in the South, which in turn causes the child wage rate to increase.
Proof:
Since the Southern firm is very small compared to the Southern agricultural sector 2, the child wage rate is determined by the demand for child labor in sector 2 and total child labor supply.
Assuming the child labor market to be competitive, the marginal value product of child labor in sector 2 has to be equal to the child wage rate:
c
c w
L2 ξ−1 = ξυ
Solving for L2c, we then obtain the demand function for child labor in sector 2:
1 1
2
= ξ−
ξυc
c
L w
If L1c is small, we have in equilibrium L2c =LSc . From this we obtain the equilibrium child wage rate
( )
ξξA higher z thus results in a higher equilibrium child wage rate. Consequently, a higher z gives rise to a lower child labor employment in the South, via (46).
The disutility of the Northern consumers when Southern children go to work in the pre-vious was specified in (43) as:
1c*
cl L
u =−ψ .
A contingent punitive tariff will reduce the negative externality as already seen in
sec-tion 10.3. ( 1 * 0
ψ ). Since the Southern firm is small, a higher contingent punitive tariff in sector 1 has no effect on the child wage rate rate. The children will simply be substituted by adult labor in sector 1 and will find employment in the agricul-tural sector 2. Thus a higher contingent punitive tariff has no effect on the total inci-dence of child labor in the South but only results in children being substituted by adult labor in sector 1 and finding employment in sector 2 instead. Thus the implicit assump-tion made in (43) is that Northern consumers are characterized by “false” altruism to-wards children working in the Southern export sector since they derive a utility gain if children do not take part in the production of the good they consume independent of the child workers’ fate.
Assume now that
(47) uchild (school) > u child (employment in sector 1) > u child (employment in sector 2),
i.e. children derive a higher utility if they attend school than if they go to work, and they are better off if they work in sector 1 than if they work in sector 2. Thus, if children are replaced in sector 1 by adults because of a higher contingent punitive tariff, this comes at a utility loss on the part of the children, whereas Northern consumers derive an utility gain, which we call “false” altruism.
If Northern consumers did really care about the children’s welfare, they would not want children to work at all. A utility function of the consumers in the North that captures this kind of “true” altruism has the following appearance:
(48) ucl =−ψLSC *
As shown in Lemma 2, a higher transfer gives rise to a reduction in total child labor supply. The children drawn out of the workforce will attend school instead. Thus, the Southern children’s utility will increase by transfers due to our assumption in (47). This will reduce the Northern consumers’ disutility according to (48). Given “true” altruism as specified in (48), a higher contingent punitive tariff, however, will have no welfare effect on Northern consumers since children replaced by adult labor in sector 1 will find employment in the agricultural sector 2.
“Sophisticated” altruism would take ucl into account according to (47). This means that if children are driven out of the export sector into the agricultural sector due to a contin-gent punitive tariff, Northern consumers would suffer a utility loss. On the other hand they would derive a utility gain if children were driven out of the agricultural sector into the export sector. The utility gain, however, would be highest if children did not work at all but attended school instead.
Taking these considerations into account, the political support function of the Northern government is assumed to have the following appearance:
(49) M = −ωt2 - δ z + µ CN (t)
−ψ[ucl(t =z=0)−ucl(t,z)]
The second term on the RHS of (49) now denotes the transfers weighted with δ that decrease the utility of the consumers. The last term on the RHS (49) now denotes the disutility of the Northern consumers caused by the Northern government not combating child labor by either imposing a contingent punitive tariff or making transfers.
If consumers are characterized by “false” altruism, i.e. if ucl =−L1c*holds, we obtain the following two first order conditions of political support maximization:
(50) * * 0
At t=0, Mt >0 as seen in (50) since the expression in the bracket in (50) is positive. Thus it will be optimal for the government to make use of contingent punitive tariffs, i.e.
t*>0. If ψ is sufficiently large, the expression in the bracket in (51) becomes negative and thus
ψ becomes positive (due to
z government to combine both feasible policies, i.e. contingent punitive tariffs and trans-fers, where we obtain the optimal contingent punitive tariff t* and the optimal transfer s* from (50) and (51). gov-ernment to make use of contingent punitive tariffs, i.e. t*>0. If ψ is sufficiently large, the second positive term will outweigh the first and third negative terms in (53), i.e. at z
= 0, Mz > 0. Thus it will be optimal for the government to make use of transfers, i.e. z*
>0. Summed up, for a sufficiently large ψ it will be optimal for the government to combine both feasible policies, i.e. contingent punitive tariffs and transfers, where we obtain the optimal contingent punitive tariff t* and the optimal transfer s* from (52) and (53), respectively.
Only if Northern consumers are “truly” altruistic and if Northern firms do not lobby, the first best policy to combat child labor (t*=0, s*>0) will be chosen by the Northern gov-ernment. We therefore have
Proposition 5: The international anti-child labor policy that maximizes truly altruis-tic Northern consumers’ utility by reducing the negative externality caused by child labor in the South is the exclusive use of transfers. However, lobbying of import-competing domestic firms and false altruism of Northern consumers will prevent the political support maximizing Northern government to use this first best policy; the gov-ernment will rather make of both transfers and contingent punitive tariffs.
10.5. Conclusion
Theoretical studies suggest that trade policies are not among the first best policy instru-ments to accomplish worldwide compliance with internationally harmonized child labor standards. Nevertheless, there are demands in developed countries to apply, for exam-ple, contingent punitive tariffs against countries that use child labor in producing ex-ports. We resolve this puzzle by developing a political-economic model that explains the use of such trade policies to combat child labor.
In our political-economic model a contingent punitive tariff is determined endogenously in a developed country in which child labor does not exist. The contingent punitive tar-iff is imposed on imports from a developing country if the exporting firm is detected or convicted of using child labor. The import competing industry in the developed country will gain from such a contingent punitive tariff whereas the firms in the developing country will lose, and the impact on consumers’ welfare will be ambiguous because the price and the compassion effect work in different directions. For certain parameters
there will be an interior equilibrium contingent punitive tariff chosen by the support maximizing government in the developed country.
Applying comparative statics, we find an ambiguous result concerning the impact of a higher child wage rate on the equilibrium value of the contingent punitive tariff. For a low child wage rate and a correspondingly high incidence of child labor, an increase in the child wage rate gives rise to a higher equilibrium contingent punitive tariff. How-ever, for a high child wage rate and a correspondingly low incidence of child labor, an increase in the child wage rate gives rise to a lower equilibrium contingent punitive tar-iff. Thus the relationship between the child wage rate and the equilibrium contingent punitive tariff can be described by an inversely u-shaped function. The critical child wage rate which maximizes the tariff decreases if the consumers in the developed coun-try are subject to “false” altruism, i.e. if consumers derive a utility gain if children are driven out of the export sector by levying a contingent punitive tariff. This hypothesis can, in principle, be tested empirically.
Another interesting result of the model is the following: if transfers from the developed country earmarked to finance schooling costs incurred by poor families in the develop-ing country are feasible as a second policy instrument to combat child labor, the first best policy (namely the transfers) may not dominate the second best policy, i.e. the tar-iff. This is because lobbying of domestic firms and “false” altruism of domestic con-sumers may prevent the domestic government from implementing the first best policy.
Thus consumers in developed countries who do not want children to take part in the production of their consumption goods are accessary to the crice of children being pushed by trade policies into sectors where they are worse off.
Appendix 10A1: Proof of the Comparative Static Results
>0 and Mtt < 0 the expression above is clearly positive.
(2)
corresponds to the sign of the sum of the expressions in the square bracket, i.e. negative term in the square bracket outweighs the second positive term.
Since
tis the highest possible
tariff , a sufficient condition for the sign of wc
t
∂
∂ *
being clearly negative is
_
b) =
For the sum of the expressions in the square bracket to have a positive sign, it is suffi-cient if
> α β , i.e. the first positive term outweighs the second negative
term for the highest possible t.
b) ¿
For the sum of the expressions in the square bracket to have a positive sign, it is suffi-cient if
> α β , i.e. the first positive term outweighs the second negative
term for the highest possible t.
c) =
For the sum of the expressions in the square bracket to have a negative sign, it is suffi-cient if
> α β , i.e. the first negative term outweighs the second positive
term for the highest possible t.
(4) =
For the sum of the expressions in the square bracket to have a negative sign, it is suffi-cient if
> α β , i.e. the first negative term outweighs the second positive
term for the highest possible t, and additionally nN is sufficiently large .