Paper Presentation In Confluence X (2015)

1. Avipsha Sengupta
Subham Gupta
guptasubham0803@gmail.com
CHILD LABOUR: AN INTER-TEMPORAL APPROACH
Abstract:
Child labour is a growing problem worldwide. It has severely affected many countries, one of the
major victims being India. Poverty has always been attributed as the main cause of child labour
and this has been shown by several static models. Our model, however, would like to analyse
this serious issue and its roots using an inter-temporal (specifically two period) framework and
speculate suitable macroeconomic factors that can help reduce child labour.
Introduction:
A child is considered to be involved in Child Labour activities under the below classification
given by the United Nations International Children’s Emergency Fund (UNICEF):
• Children 5 to 11 years of age, those who did at least one hour of economic activity or at least
28 hours of domestic work during the week preceding the survey did and
• Children 12 to 14 years of age those who did at least 14 hours of economic activity or at least
42 hours of economic activity and domestic work combined during the week preceding the
survey.
Child labour is a complicated and ongoing issue in the present world. According to the statistics
given by International Labour Organization (ILO) and other government agencies, more than 73
million children between 5 to 14 years of age are considered as child labour. Asian countries
occupies distinctive place with 44.6 million child labour followed by Africa with 23.6 million
and Latin America with 5.1 million. Child labour is wide spread in rich and industrialized
economies than in poor countries. As per Census 2011, the number of working children in the
age group of 5-14 years in India is 4.35 million. According to the statistics, child labour is more
prevalent in villages than in the urban areas. Nine out of ten village children are employed in

2. agricultural or household industries and small scale industries like craftwork. As a r esult of
urbanization, more children are getting involved in the service and trading sectors as compared
to marketing. To differentiate on the basis of gender, it is considered that more boys are
employed in laborious activities than girls. This consideration is made based on the fact that it is
difficult to take a count of girls working in households.
Child labour can be found majorly in the sectors mentioned below:
1. Bonded Child Labour
2. Child Labour Agriculture sector
3. Street children
4. Children at glass factories
5. Child labour in match box factories
6. Child labour in carpet industry
7. Child labour in Brass and Lock industries
The following table shows a specific sector wise distribution of child labour in India:
Table : Overview of Children's Work by Sector and Activity
Sector/Industry Activity
Agriculture
Farming, including producing rice and hybrid cottonseeds, picking
cotton, and harvesting sugarcane
Industry
Quarrying and breaking stones
Manufacturing matches, bricks, locks, glass bangles fireworks,
footwear, garments, hand-loomed silk fabric, silk thread, leather
embellished textiles, and brassware
Polishing gems
Weaving carpets
Rolling cigarettes (bidis) and incense sticks (agarbattis)
Spinning thread/yarn, embroidering, sewing beads to fabric
Stitching soccer balls
Mining mica*
Services
Working in hotels, food service, and certain tourism-related
occupations

3. Working on the street selling food and other goods, repairing vehicles
and tires, scavenging, and rag picking
Construction, activities unknown
Domestic service
Categorical Worst Forms
of Child Labour
Forced or bonded labour in gemstone cutting,* quarrying stones, brick
kilns, rice mills and in the production of hybrid cottonseeds,
garments, and embroidered textiles (zari)
Commercial sexual exploitation, sometimes as a result of human
trafficking
Forced labour in domestic service, agriculture, carpet weaving,* and
begging
Use of under-age children in armed conflict
*Evidence of this activity is limited and/or the extent of the problem is unknown.
It is very essential to understand the determinants of this phenomenon of Child Labour because it
is only then that we can formulate policies to combat it to avoid unexpected counter-effects. The
supply of child labour comes mainly from family poverty issues, as families with very low
income feel forced to make their children work.
Besides all the severe consequences that child labour has on the health and education of these
young members of the population, the economic impact is massive. It weakens the power of
adult workers as they are forced to compete with the low cost labour that is preferred by firms.
Basically, parents are unable to work because companies prefer to hire their children. Also,
wages are generally driven down, as firms need to compete with the ones that have really low
costs and low prices. Although, it is believed that in the short-run, child labour may increase
families’ income and probability of survival, in the long-run, it perpetuates poverty through
lower human capital accumulation. In terms of schooling, there is evidence of reduced enrolment
rates and higher rates of drop out among employed children. Some children even try and
combine work with school but it is obviously harmful in the sense that it does not develop the
adequate skills required by them and instead, subtracts time to other forms of human capital.
There is clearly a poverty trap beginning in children working, not getting enough proper
education and becoming illiterate adults who, in turn, send their children to work because they
do not have means to support themselves and the family, thus perpetuating the cycle.
Hence it is of utmost importance to set policy targets, which will not only reduce the use of
children as labourers but also break the vicious cycle of poverty, not depleting human capital
incessantly.
One of the earlier models on Child Labour explaining the speculated causes, and their possible
solutions, was constructed by economists, Kaushik Basu and Pham Hoang Van in 1998.

4. The model was explained in a static framework and assumed two axioms:
Luxury axiom: According to this axiom, children would not be sent to work if the income from
non-child labour sources in the household would have been sufficiently high.
Substituition axiom: This axiom talks about the fact that adults can substitute children, i.e the
work that children can perform, adults can also perform.
The above model is static and so this limits the problem to an instant. However in order to
understand the long term bothersome effects of this issue, we need to assume an inter-temporal
framework. So, we will adapt the Basu-Van model of Child Labour and try and explain it inter-
temporally.
This paper is organized as follows: the next section surveys the literature and some other causes
of child labour. A theoretical framework outlined in next section describes the policy
implications and conclusion.
Existing literature and some causes of child labour:
There are several factors that contribute to theexistence of child labour despite it being banned or
consideredundesirable. The key among them seem to be poverty, creditmarket imperfections,
imperfect land and labour markets andcharacteristics of a household. Basu and Van’s model of
child labour (1998) is a pioneering one. In their model, which depends on a well-functioning
labour market, poverty is shown to drive childlabour. Imperfections in the labour and credit
markets also help explain the existence of child labour. Ranjan (2001) showed that credit
constraints could lead to child labour as the inability to borrow against labour income could
adversely affect consumption. Absence of feasible insurance can also explain child labour. For
example,a recent survey in Pakistan showed that credit facilities accompanied with insurance can
help combat child labour. If the households can borrowand if education is profitable poverty will
not be a constraintin sending children to school. Similar results are also found in Baland and
Robinson (2000). Another aspect is the use of children as insurance. Dillon (2013) showed that
there is an increase in child labour at the intensive and extensive margin in response to shocks.
Parental education is another determining factor of child labour. In one commonly observed
pattern, parents with higher education, tend to educate their children ratherthan sending them to
work.
Children’s education plays a very crucial role in the development of poor households. Such
households usually have little or no physical assets and so, educating the children could
potentially help break the vicious cycle of poverty through human capital accumulation. At the
same time, child labour in India continues to be a matter of concern. The NSSO’s exclusive ad
hoc survey on education (Education in India: 2007-08) found that the most important reasons for

5. non-enrolment in or discontinuation from educational institutions were that the parents were
uninterested in educating their children, financial constraints and that education was not
considered necessary. However, the cost of education seems to be the dominant obstacle in
educating the children of poor households. The survey found that, out of those children who
discontinued their education in the age groups 5-9 and 10-13, about 24.8 percent and 23.8
percent, respectively, discontinued owing to financial constraints.Income from a child's work is
felt to be crucial for his/her own survival or for that of the household. For some families, income
from their children's labour is between 25 to 40% of the household income. According to a 2008
study by ILO among the most important factors driving children to harmful labour is the lack of
availability and quality of schooling. Many communities, particularly rural areas do not possess
adequate school facilities. Even when schools are sometimes available, they are too far away,
difficult to reach, unaffordable or the quality of education is so poor that parents wonder if going
to school is really worthwhile. In government-run primary schools, even when children show up,
government-paid teachers do not show up 25% of the time.The UNICEF report claimed that
while 90% of child labour in India is in its rural areas, the availability and quality of schools is
decrepit; in rural areas of India, claims the old UNICEF report, about 50% of government funded
primary schools that exist do not have a building, 40% lack a blackboard, few have books, and
97% of funds for these publicly funded school have been budgeted by the government as salaries
for the teacher and administrators. The infrastructure in schools, aimed in part to reduce child
labour, remains poor - over 81,000 schools do not have a blackboard and about 42,000
government schools operate without a building with makeshift arrangements during monsoons
and inclement weather. Biggeri and Mehrotra have studied the macroeconomic factors that
encourage child labour. They focus their study on five Asian nations including India, Pakistan,
Indonesia, Thailand and Philippines. They suggest that child labour is a serious problem in all
five, but it is not a new problem. Macroeconomic causes encouraged widespread child labour
across the world, over most of human history. They suggest that the causes for child labour
include both the demand and the supply side. While poverty and unavailability of good schools
explain the child labour supply side, they suggest that the growth of low paying informal
economy rather than higher paying formal economy - called organized economy in India - is
amongst the causes of the demand side. India has rigid labour laws and numerous regulations
that prevent growth of organised sector where work protections are easier to monitor, and work
more productive and higher paying. The unintended effect of Indian complex labour laws is the
work has shifted to the unorganised, informal sector. As a result, after the unorganised
agriculture sector which employs 60% of child labour, it is the unorganised trade, unorganised
assembly and unorganised retail work that is the largest employer of child labour. If
macroeconomic factors and laws prevent growth of formal sector, the family owned informal
sector grows, deploying low cost, easy to hire, easy to dismiss labour in form of child labour.
Even in situations where children are going to school, claim Biggeri and Mehrotra, children

6. engage in routine after-school home-based manufacturing and economic activity. This all but in
long run hampers human capital accumulation which can be detrimental to economic prosperity
of the nation. This paper thus helps develop a model of household optimization in a two-period
inter-temporal framework and explain how changes in some macroeconomic factors can
motivate the householdsthemselves to reduce the amount of child labour.
Model:
The main assumptions of the model have been taken from the model given by Basu and Van
(1998) and along with some more assumptions introduced in the model. Parents make all
relevant decisions regarding present and future consumption including those on children’s
schooling and participation in the labour market. All the households are identical in size, the
economy produces single consumption goods, all firms are identical, and a household will send
the children to the labour market if the household income drops below the subsistence level of
consumption (the luxury axiom) and from a firm’s point of view, adult and child labourers are
substitutes (the substitution axiom).
For expositional purposes households are considered to consist of one adult and one child - two
parents are considered to be one adult. Similarly, two children are considered to be one child.
There is a large number of families, labelled i = 1, 2…n. Each family consists of a adult and one
child.There are two periods, labelled t = 1; 2. Parents and children are alive in the both the
periods. Parents (a single entity) supply labour inelastically Lat =1, in both periods no matter
what is the wage rate and obtain a wage, wat. Children work, LCt ∈ [0,1] in both the periods
obtaining wage Wct which the parent can appropriate completely.
Households
The household derives utility from consumption and disutility from child labour. The utility
function of the household in each period is given as:
Ut=logCt – blogLct 0<b<1
Where Ct the consumption of the household at time t=1, 2 and Lct is the amount of child labour
in period t=1,2 . ‘b’ can be interpreted as the measure of altruism. As this utility depends only on
consumption ,we are implicitly assuming that leisure is not a good .This may be justified by
saying that at very low levels of income, the marginal utility of is too low to be significant.
However, child work reduces utility.

7. The parents work in unskilled adult labour market earning an unskilled wage rate Wat in period
t=1,2 In period 1, the child is of school age .If she does not enrol for school, she will be working
earning a child wage rate Wct. Child work hampers human capital formation . If the child
continues to sacrifice schooling, she will be earning low unskilled wage when she becomes an
adult.
The parent maximizes sum of present utility and a discounted value of future utility makes
decision on child labour. The household maximization can be given by:
where the maximization is subject to the household budget constraint as:
where ‘ρ’ is the subjective rate of discount and ‘r’ is the real rate of interest.
From the first order conditions we get:
( )
( )
Thus child labour is obtained as an inverse function of the real rate of interest prevailing in the
market .As the real rate of interest rises, the present value of future consumption decreases and
thus the parents decreases child labour participation .Similarly , as the current child wage rate
rises , child work decreases .
Firms:
All firms are identical that behaves competitively and operates on constant returns to scale to
produce a homogenous output .Labour is demanded by a profit-maximizing firm which for

8. simplicity we assume is not forward looking. Firms use parent and child labour at a given wage
rate Wa and Wc. The production technology of the ith
firm is given by:
Yi = Yi ( La , Lc )
Since adult labour is inelastically supplied i.e. La =1 and Lc=f(r,wc1/wc2), the aggregate supply
(AS) in the economy is given by :
∑
The aggregate supply (AS), is an inverse function of the real rate of interest and is thus
downward sloping.
The aggregate demand (AD) in the economy can be given by:
The government expenditure G is assumed to be autonomous.Investment is an inverse function
of the real rate of interest. Thus the AD curve is also downward sloping. However the slope of
AD curve is assumed to less than the slope of AS curve for stability condition.
The market equilibrium is attained at a E0 where the AD and AS intersect and the real rate of
interest and output is given by (r0, Y0) as shown in the figure below:
r
r1 E1
r0 E0
AD2
AS AD1
Y1 Y0 Y

9. A favourable demand shock as in the form of rise in government expenditure G raises the real
rate of interest in the market. Consequently, production falls due to fall in child work. The fall in
child labour can be attributed to fall in present value of future consumption of the household thus
inducing them to supply less child labour.
Conclusion:
From the optimization framework, we have derived that there exists an inverse relationship
between the real rate of interest in the market and child labour.
Hence, if due to certain macroeconomic policies, say expenditure by the Government, or any
other favourable demand shock, the real rate of interest rises, then from the above mention
conditions we can say that, the households will be induced to reduce participation of their
children in work.
APPENDIX:
The household choice problem is:
Max [U1 (C1, L1c) + U2 (C2, L2c)] with respect to (C1, C2, L1c, L2c)
Where the maximization is subject to:
C1 + C2/(1+r) = w1A + w2A/(1+r) + w1cL1c +w2c L2c/(1+r)
Setting the Lagrange,
£= [log C1– b log L1 + {log C2– b log L2}] + λ[C1 + C2/(1+r)- w1A + w2A/(1+r) - w1c L1c - w2c
L2c/(1+r)]
The first order conditions are:
= 0 which implies, 1/C1 +λ = 0
= 0 which implies,1/C2 ( + λ/ (1+r) = 0
= 0 which implies,-b/L1 - λw1c = 0
= 0 which implies, -b/L2 ( ) - λw2c/ (1+r) = 0
= 0 which implies,C1 + C2/(1+r)= w1A + w2A/ (1+r) + w1c L1c + w2c L2c/(1+r)
On solving we get,

10. =
= )( )
References:
Basu, K and Van, P. (1998). The Economics of Child Labour, American
Economic Review.
Ranjan, P. (2001). Credit constraints and the phenomenon of child labour.
Journal of Development Economics