Sunday, May 3, 2009

Comprehending Child Labour.

Comprehending child labour and examining the rationale for its existence shall depend on the disciplinary orientation of the examiner. However the attempt here is to provide an explanation from the perspective of economic development by using the science of development economics.

The basic hypothesis, using this model is to unravel why, in spite of people the world over being almost similar, there exists a sea of difference in economic achievement. The answer to this lies in history which plays a significant part in the explanation.

Focusing on what a development economist would term as coordination failure, there is a possibility of making the following assumptions in development economic terms: Firstly, a child’s contribution to the labour market reduces his/.her capacity to accumulate human capital. Consequently, it flows logically that those children who participate in the labour market receive a lower return on their education investment by virtue of a failure to accumulate sufficient, qualitatively determined human capital.

Any analysis of the role of ‘History and Expectations’ in explaining the prevalence of the problem of child labour, would allow us a perspective on what can be termed as parental human capital - Essentially we can say there exist three mutually exclusive kinds of human capital. The first category presents us with a situation, explained by a poverty range where parents go for relatively more children, send their children to be integrated into the child labour market, thereby compromising on the possibility of a complete educational experience. This decision is independent of the possible returns to education. And the household’s decision remains unique.

Focussing our attention to the second category, a certain kind of prosperity range, parents decide to have fewer children and also make arrangement to provide them with a complete education, deciding against integrating their children into the labour market. Similar to the first category this is also a unique situational model.

The third category presents the most interesting model. It is an expectation and history range. Thus it is possible to extrapolate that the parent’s beliefs interact with the parent’s human capital to negotiate and decide on one of the aforementioned equilibrium paths.

Moreover for the first category, it intuitively follows that the for levels of parental human capital within the poverty range the parent’s earnings are so low that it is optimal to have more children and to send these children into the labour market to provide for household consumption.

At the direct opposite end of the spectrum, when the level of parental human capital falls within the prosperity range, the parent’s earnings are sufficient to provide for household consumption requirements and in this regard it is optimal to have fewer children and to make arrangements for the provision of a complete education. This furthers the argument that the dynamics of child labour is such that families will only send their children to work if forced to do so by economic necessity.

However, within the expectations range, this idea need not necessarily hold and initial conditions are insufficient to determine the household’s optimal choice. Specifically within this range the mechanism of equilibrium selection depends on the state of the economy and the beliefs of the households in a way that fulfils the household’s expectations. This implies that if a parent believes that the return to education is high, then the concerned parent is more likely to have fewer children and each child’s education is likely to be completed (no child labour) which fulfils the households initially high expectations.

Looking at it from another prism, if the same parent would believe that the return to education is low then this parent will have more children and send these children into the labour market. The fact that the children participate in the labour market implies that they incur the negative child labour externality, which reduces their ability to accumulate human capital. Therefore, because the parent believes the return to education is low, the parent undertakes actions that fulfil this initially pessimistic expectation.

Here, for apparently ex-ante identical households it would appear ex-post that they came from completely different demographic and economic regimes – the cornerstone of the hypothesis being explored from the question.

Since the concentration is on public policy it is important to state that the existence of an expectations range introduces an important role for government policy. Government policy can be used to steer expectations away from a ‘bad’ equilibrium. For example, banning child labour and mandating education will force households to learn that the return to education is higher than they believed.

Thus, by removing the child labour, incomplete education, high fertility option from the household’s choice set, the household is forced to internalize the negative effects of child labour and move to the Pareto superior outcome with low fertility, complete education, and no child labour.

Consequently it is not difficult to argue that once the household’s expectations have been altered there will no longer be any need to enforce child labour and education laws because families will now internalize this high return to education and choose to educate their children in the future. This policy intervention will also reduce fertility as households substitute child quality for quantity.

In this framework, it is extremely interesting to note that if a government implements a policy that bans child labour and mandates education within the ‘poverty range’, this will unambiguously reduce household welfare for the current households. Thus the appropriateness and effectiveness of a ban on child labour may not only depend on the cause of child labour but the stage of the development process.

This very idea of expectations serving as an equilibrium selection mechanism has a long history in development, dating back to the seminal work of Rosenstein-Rodan (1943, who died recently) and the further theory of the “big push”.

Let us discuss the variety of outcomes on offer - If all households choose a complete education then the return to education is high enough to support this equilibrium. On the other hand, if some households deviate from this choice then the return to education will be too low to support this equilibrium and we will observe complete child labour.

Moreover in these two frameworks policy serves as a coordination mechanism whereas, it could also serve as a learning mechanism! Thus perceiving child labour from the lens of history and expectation demonstrates that indeed initial levels of human capital can influence the development path of a particular country in a particular instance and in a particular context.

An attempt to summarise all of the aforementioned ideas would essentially make us agree with the following conclusion - Poverty and child labour are linked: poor households are often forced to make difficult decisions about current consumption and future income when deciding the number of children to have, the amounts of educational inputs for their children and how much they can be made to work.

Thus, implicitly in making such decisions families are required to forecast the future returns to education. The actual returns to education, however, will likely depend on a number of factors, including the growth of the overall economy and inputs into the education infrastructure by the government.

However, it would not be too far fetched to state that it is unrealistic to expect perfect foresight on the part of poor households, so these households will likely extrapolate the future returns to education based on their own experiences. It is also likely that working as a child will harm the overall human capital attainment of an individual, so the adult labour market experiences of parents who were child labourers may be quite different than those who were not.

A situation or a vector of circumstances that has overlapping generations where the household’s optimal fertility, child labour, and education decisions depend on the parent’s expectations or beliefs. We are aware that there exists a range of parental income where the fertility rate is high; the child participation in the labour market is causally connected to incomplete education if a parent believes the return to education is low.

Furthermore, due to the fact that the children’s participation in the labour market reduces their ability to accumulate human capital as a result of a negative child labour externality, the action of sending the children into the labour market is sufficient to ensure that the parent’s initially pessimistic expectations are fulfilled and justified with real world developments.

The opposite end of the spectrum, however, introduces us to something very different, if the parent believes the return to education is high, then fertility rate is low, and each child receives a complete education (no child labour). This action, in turn, fulfils the household’s optimistic beliefs since the children do not incur the negative child labour externality. So we can extrapolate that a onetime policy intervention, such as a banning of child labour and making education mandatory, can be enough to move a country from the positive-child labour equilibrium to the no-child labour equilibrium by temporarily removing the high fertility/child-labour/incomplete education equilibrium from the household’s choice set when parental income falls within this ‘expectations’ range.

Thus since we can also extrapolate that this type of policy intervention either reduces household welfare if parental income is below this ‘expectations’ range or is unnecessary above it, we could, for instance, also vaguely conclude that policy effectiveness depends and/or would largely depend on the stage of the development process.

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