In a recent post I asked people to draw me a picture, illustrating the claim floating around the free-market blogosphere that India’s ban on child labor perversely led to more children being employed. (If you don’t know/remember the context, you need to go read that first post for this one to make any sense.)
Well, Tel in the comments gave a nudge in the right direction, but as usual, if you want something done…
So in the above diagram, we see that even though the Demand for child labor drops (from D-1 to D-2) after the government announces it will fine any employer caught with kids on the payroll, nonetheless the total quantity of child labor increases in equilibrium.
The reason, of course, is that the Supply curve has a region that is “backward bending,” presumably because the income effect dominates the substitution effect.
OK, I suppose that’s possible, but what really made me suspicious was that the academic paper that started this whole discussion says–unless I misunderstood it–that not only did the number of children employed go up, but that the total wages paid to children increased as well (and by a lot).
Does that really make sense? I guess you could do it for an individual household. They needed the 14-year-old to bring in $5/week, then the child labor ban cut his earnings to $4/week, so the family sends his younger sister (who only makes $2/week) so the two combined end up bringing home $6/week, a 20% increase from the original outcome. And given that you’re going to send his sister to the factory, you might as well make her go full-time, rather than just enough to make up the shortfall in “mandatory” income.
But does this make sense for the country as a whole, and over many years?
To repeat, I’m not saying this story is impossible, I just think free-market fans are too quick to trumpet this explanation since it fits in so nicely with their hostility to the ban on child labor. (Also note, whether or not the explanation holds, it’s obviously not doing child laborers any favor by making it illegal for employers to hire them.)