The effect of

Trade Liberalization
on Child Labor
Eric EDMONDS and Nina PAVCNIK
Journal of International Economics 65(2) March 2005

Presented by: Mir Salim

Structure of Presentation:
Theory Motivation and Brief Literature
Review

The model, and its estimation strategy

The data

Estimation results

Robustness checks

Conclusion and quick criticisms

The Point of the Paper:

Drastic trade liberalization programs in many poor,

predominantly agricultural countries in the 1980s and 1990s.
Trade liberalization  child labor or ?
Should trade liberalization be promoted or discouraged on
child labor grounds?
Seek to answer this with empirical evidence from Vietnam in
the 1990s.

The context of the study

97% of child labor in Vietnam (and this is true of many

other developing countries) takes place inside the childs
own household (eg. agricultural work, collecting water
and wood, work in household business).
44% of food expenditure in Vietnam is on rice.
98% of all Vietnam communities produce rice.
Stringent export controls on rice imposed in Vietnam in
1989. Stringent internal flow restrictions on rice also.
Gradual liberalization of rice markets to a non-binding
level quotas by 1998.
Between 1993 and 1998, the real rice price increased
almost 30% wrt the CPI in Vietnam.

Theoretical links between Trade

Liberalization and Child Labor
Trade liberalization  relative price of rice in Vietnam . 3 effects:
1) Pure Substitution effect in Production:
Liberalization  rice price  labor demand  more child labor
2)

Pure substitution effect in Consumption:

Liberalization  rice price  child leisure relatively cheaper  less
child labor

3)

Pure income effect:

Liberalization  rice price 


if net rice producer: HH income  less child labor

if net rice consumer: HH income  more child labor

GE effects (not in paper)  day labor wage income

 HH income  less child labor

Brief Literature Review:

While impact of trade liberalization on labor markets has

been studied empirically (Leamer and Levinsohn 1995),
the impact on child labor has not been empirically studied.

Theoretically modeled with child labor as a bad in parental

preferences (Basu and Van 1998, Bommier and Dubois
2004), or if households face credit constraints (Baland and
Robinson 2000, Ranjan 2004).

Much of the increase in relative rice prices in Vietnam in

the 1990s can be attributed to international and national
rice market integration (Brandt and Benjamin 2004).

The model:

Consider household in small open economy that produces a and n.

CRTS technology in child labor L and land K.
Sector a is more child-labor intensive.
Household welfare depends on consumption of a, n and
consumption of child leisure.
Child labor is a bad (child leisure is a good).
Child labor supply is outcome of household welfare maximization
problem.
Country is small exporter of agricultural goods.
Transport costs drive wedge between domestic and world prices:
pd = pw /
Because net exporter, > 1. Trade liberalization  1  pd .
With pd change, three-prong income and substitution effects as
detailed previously, empirical answer to net impact.

The Data:

Two rounds of the Vietnam Living Standards Survey (VLSS), 1992-93 and 1997-98.
Two panel dimensions to dataset:
 115 rural communities visited each round, random sample of children then aged
6-15 years in each round. 4,850 children in Round 1 and 4,703 in Round 2.
 3,397 households with children re-visited, restricting survey to children then aged
6-15 years in these households. 4,586 in Round 1 and 4,441 in Round 2.
Child work:
 Child labor if more than 7 hours of work during week before (aggregated) in:

Child works outside for pay (whether cash or in kind)?

Child works in agriculture for household.

Child works in household business.

Child works in household production activities, such as collecting water,
wood, building and maintaining house, household chores.
 Both participation data, and total hours of work for each category recorded.
Household annual cropland assignments.
Household net production in 1992-93.
Detailed community price survey conducted in community market concurrently with
VLSS.
 Price of 1 kg ordinary rice in 1993 and 1998.
 Prices deflated with monthly CPI so prices are in 1998 currency units (Dong).

Fig 1: Community Level Rice Price Increases and Declines in Child Labor

Empirical Framework:
Linear probability model for participation in child labor market as a
response to rice price differences:

y : indicator, 1 if child engages in child labor, 0 otherwise

RP: log (real price of ordinary rice, in 1998 Dong)
X : controls. 3rd order polynomial in age and gender.
Season dummies, harvest dummy, plating dummy
T : economy-wide year dummy
: community fixed effect

Notes:
i, j, t denote community I, child j, time t.
Rice prices only vary at the community-year dimension i.
Uses first dimension of panel not limited to the same households in both periods.
Huber-White robust standard errors, clustered at the community-year level.
Why not use Tobit with Honores Trimmed LAD fixed effects?

Empirical Analysis: Income effects

Again, linear probability model for participation in child labor market:

y:
RP:
M:
X:

indicator, 1 if child engages in child labor, 0 otherwise

log (real price of ordinary rice, in 1998 Dong)
household net production in 1998
controls. 3rd order polynomial in age and gender.
Season dummies, harvest dummy, plating dummy
T : economy-wide year dummy
: household fixed effect

Notes:
i, h, j, t denote community I, child j, household h, time t.
Rice prices only vary at the community-year dimension i.
Uses second dimension of panel limited to the same households in both periods.
Huber-White robust standard errors, clustered at the community-year level.

Conclusions:
1)

2)

3)

4)

Provides empirical evidence on the

relationship between trade liberalization and
the incidence of child labor in poor, relatively
unskilled-labor abundant economies.
30% increase in rice prices are found to
decrease child labor participation by about
10%.
The pure income effect is large enough to
swamp even an unfavorable net substitution
effect in all but the largest net consumers of
rice.
Trade sanctions to eradicate child labor seem
to be fallacious.

Quick Criticisms:

External validity: considers only export-oriented

sector. What about import-competing sectors that
may see lowered prices with liberalization?
Estimation strategy: uses linear probability model
throughout in spite of its limitations.
Estimation strategy: looks only at participation.
Participation may fall, but hours may still rise for
the children who remain in the labor force.
Just two years of data. Time dummies are highly
significant in each case. Controlling with fixed
effects may be questionable.