19 Feb 2014

Follow-Up On India’s Ban on Child Labor

Economics 11 Comments

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.)

11 Responses to “Follow-Up On India’s Ban on Child Labor”

  1. Daniel Kuehn says:

    I had suggested something similar, but the opposite (i.e. – flip the S around).

    At very low wages supply is downward sloping due to lexicographic preferences. You are hitting starvation levels at that point so you will work any length of hours to feed yourself. As wages get higher you indulge in luxuries like sleep and personal hygiene.

    Once you’re out of the lexicographic/starvation zone it’s upward sloping. This is normal people territory.

    Then once you get super rich it’s backward sloping again, for normal super-rich people reasons (the standard backward bending supply curve).

    To get this to work, the demand curves have to be down near the lexicographic zone (which presumably they are for families that send their kids to sweatshops). I can send you a picture if you want.

    I don’t necessarily buy it. I think there are problems with their model. As I said in the last post, the design is a DID, but the use of over and under 14 year olds for this seems a little dubious because of spillovers between labor markets, although (I think) the bias should be in the other direction (the bias from spillover should show a stronger negative impact than is actually the case because it would make the control group look better off), so the fact that it shows a positive effect is a little odd.

    So I don’t know what’s going on and I don’t necessarily buy it, but that’s another model that I think is a little more plausible than this one (and it’s also somewhat consistent with their figure 1, although I’m not exactly sure what’s going on in that).

    • Silas Barta says:

      Lexicographic preferences? I though alphabet-based preferences only happened in examples designed to be goofy. There aren’t *actually* any people like “Abby” who orders choices alphabetically and pics the first.

      Seriously though, hadn’t heard of that in this context and had to look it up

  2. Daniel Kuehn says:

    You need to explain why the income effect dominates the substitution effect in what you’ve drawn. Maybe there’s a reason, but I don’t see it.

    If you flip it around it’s very clear why the income and substitution effects would work the way they do (although the initial downward sloping supply curve isn’t the result of a traditional income effect).

    • Bob Murphy says:

      Daniel I had the normal starvation story in mind when I drew that. But clearly at zero wages, people work zero hours, so I thought the substitution effect had to dominate income effect for extremely low wages.

      • Daniel Kuehn says:

        I’d guess downward sloping at low wages with a discontinuous jump at zero if you’d like but probably everyone would have selected out of wage labor and into home production by then.

        • Bob Murphy says:

          DK wrote:

          I’d guess downward sloping at low wages with a discontinuous jump at zero if you’d like but probably everyone would have selected out of wage labor and into home production by then.

          Right, so wouldn’t that mean substitution effects would start dominating as wages got really low?

  3. Dan (DD5) says:

    Another alternative explanation would be something like : There is no causal relation between the ban and the increase in supply. There are other forces/variables in play that caused the supply to increase just about the same time the ban went into effect. Absent the ban, the increase in supply would have even been even bigger. This is a mere “fooled by randomness” (Nassim Taleb?) type of event. I mean, would you really blog about it if it showed what you had expected? Probably not, and so this study is getting a disproportionate amount of attention contributing to the illusion of its significance.

  4. GeePonder says:

    Bob said:

    “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.”

    Forgive any boo-boos as I admit I’m no economist, but like Bob says: Everyone learns at Free Advice. What I’m about to propose may also not be what is really going on here; it is as theoretical as the rest of the discussion has been.

    First, I’m listening to one of your Mises courses (PTPT) and you state THE law of supply and demand. Doesn’t your Supply curve violate that “law”? But isn’t that law believed to be apodictically correct per praxeology?

    Second, while the supply curve could just sit there ceteris paribus, wasn’t there an event that happened here, such that things are not the same. The pressure on employers vis-a-vis the child labor laws is also understood by the prospective employees, or at least their parents, eh? And since the parents aren’t automata they are likely to react to changed circumstances, just as your narrative suggested.

    But your narrative to me suggests a shift in the supply curve based upon the “event.” And therefore, wouldn’t a shift downwards of a (“normal”) upward sloping supply curve (in reaction to the event) also explain the new equilibrium (as odd as that seems!) but not violate the law of supply and demand. If I follow the rules and shift the supply curve down the Y axis I can hit the W-1:Q-1 equilibrium and the same W-2:Q-2 equilibrium point that you do with your squiggly supply curve that seems to violate the law.

    And since we are speaking theoretically here, your narrative seems to support it.

    My only other comment for fun is: THIS IS MADNESS!

    I assume I’m thinking incorrectly here. Hopefully someone will point it out to me.

  5. tom says:

    “But does this make sense for the country as a whole, and over many years?”

    Seems like there is a simple explanation, the implicit assumption is that wages of the children now working are going from 0 to X. Reality is that the children are almost certainly preforming tasks at home (chores) that provide some, if limited, economic benefit. The family then needs the child to replace this value in addition to making up the shortfall from lower wages.

  6. Vedantin says:

    In India, laws are meant for cheering purpose. There is almost no enforcement of any law (including violent crimes) except where the public official can use it for his advantage (bribes, political black mail etc). There is absolutely neither a correlation nor causation between ban and the actual child labor market. Most of the children employed are in household labor or small restaurants (washing dishes, laundry, mopping floors,serving tree etc). This is poor country’s equivalent of the US kids being employed to mow neighbor’s lawn. There is no formal industry/factory which employs kids.

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