WELFARE IMPACT OF A BAN ON CHILD LABOR

I. INTRODUCTION The issue of child labor has recently been the subject of a surge in formal economic analysis. According to the International Labor Organization (2006), there has been a significant decrease in child labor and an even steeper decline in hazardous child labor; nevertheless, in 2004, there were still 218 million child laborers, of whom 126 million were in hazardous work. The increase in research around this topic is in part the result of the growing awareness of the persistence of child labor around the world and the importance of developing theoretical models that help us understand the incidence of child labor and its implications, as only then can we recommend and implement effective policy interventions. The economics literature is ambiguous on the desirability of a ban on child labor. Child labor is typically viewed as the result of some deeper problem in the economy, and addressing child labor without solving the problem that leads to its occurrence can make children worse off. For example, Dessy and Pallage (2005) present an environment where, although child labor has a negative direct impact on children's well-being, it is the best available choice for children. Hence, a ban on child labor, even on its worst forms, deprives children of their best possible choice and can make children worse off. Standard arguments for the imposition of restrictions on child labor are based on the existence of externalities, such as positive externalities from a well-educated population (see Udry 2006). A ban on child labor leads children to allocate more resources to education, brings the average levels of human capital closer to the optimal, and consequently increases welfare. Constraining the amount of labor supplied by children is also often suggested as an instrument to move the economy toward a desired equilibrium in environments where multiple equilibria can emerge, as in Dessy and Pallage (2001) and Basu and Van (1998). Banning child labor can also be an instrument to achieve increases in efficiency in the presence of capital market imperfections. In Baland and Robinson (2000), capital market imperfections do not allow altruistic parents to internalize the negative impact of child labor on children's human capital accumulation. A restriction on the amount of time allocated to work by children is suggested to reduce the resulting inefficiently high levels of child labor. Finally, Rogers and Swinnerton (2002) advance parents' incomplete information on the type of work, safe or hazardous, their children perform as an argument for a ban on the worst forms of child labor. (1) In this article, I show that, in a standard overlapping generations economy with parental altruism calibrated to the 1880s, a ban on child labor increases parental transfers and raises children's as well as the average levels of welfare in the short run and in the long run. This result introduces a new rationale for imposing restric--ons on child labor, adding to a debate still in its early stages of development. (2) In an overlapping generations economy with altruism, the unconstrained Nash-Cournot equilibrium does not maximize the average welfare of currently living agents, as was shown in Bernheim (1989), nor the welfare of children and generates suboptimal levels of parental transfers. By reducing the income earned by children, a ban on child labor reduces children's consumption, raising their marginal utility of consumption, and parents respond by increasing transfers to children. Hence, the ban places children at a point in their parents' reaction function that results in a higher level of parental transfers. By inducing an increase in parental transfers, the ban on child labor moves the economy closer to the social optimal, generating aggregate welfare gains. Children are made better off because they receive more transfers and do not work. Parents are made worse off because they need to decrease consumption and leisure to increase parental transfers; however, the raise in their children's lifetime utility partially offsets this effect. …